Let us continue the bankruptcy theme begun in
my last post and discuss the effects of Special Purpose Entity (SPE)
bankruptcies and their effect on mortgage-backed securities. Obviously, most
bond covenants designate the bankruptcy of a SPE an event of default and restrict
the likelihood of its happening. In the unlikely event that such a bankruptcy
does happen however, here is an overview of the process.
As a quick review, I would like to restate that mortgage-backed securities are the result of a process of securitization that takes place when a real estate lender sells a package of its loans to an entity, called and SPE. The SPE receives the money to purchase the loans from the sale of either securities, beneficial interests in the entity or trust certificates from a trust set-up to hold the loans. If securities or trust certificates are sold, they are called mortgage-backed securities (MBS). Through the securitization process, real estate lenders are provided with cash to originate more loans and investors are able to purchase MBS and invest in the real estate market without having to hold real property. If you question why one would want to invest in the real estate market at all, please see my earlier post, “Why I Choose Real Estate.”