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A new generation of non-debt fixed-income finance
Abstract
Purpose
– The development of standardized fixed-income securities and organized secondary markets in which to price and trade the securities is a widely recognized factor in the emergence of modern developed economies. However, the ongoing global financial crisis has exposed the existence of a fundamental and costly conflict between lender and borrower property rights when debt is securitized that has imperiled some fixed-income markets in their present form. This paper aims to suggest a new non-debt concept for fixed-income finance that avoids the conflict inherent in securitized debt.
Design/methodology/approach
– The paper considers how to build the foundation of non-debt fixed-income technology on property law instead of contract law.
Findings
– Fixed-income products based on the new technology expose investors to lower loss risk than investors incur with analogous debt-based products. Such products could lower the cost of fixed-income finance and contribute to the global restoration of fixed-income market liquidity.
Research limitations/implications
– Variations in property law across venues imply that the new financial technology is not implementable in all legal systems.
Originality/value
– The new financial technology could represent an opportunity for the Islamic financial industry to expand its fixed-income horizons in the global financial markets. The upside both within and beyond the Islamic community could be dramatic.
... The financial structure is intended to avoid long-term contractual arrangements between property buyers and property investors other than long-term leases of ownership rights to ownership of money by property buyers. The new class of financial structures has fewer and simpler long-term contract-like terms than the standard examples of shariacompliant finance and conventional debt financing [14]. Many studies argue that the government should answer significant regulatory challenges [15]. ...
Purpose
The problem in alleviating homeowner mortgage distress through refinance is how to achieve meaningful alleviation without prospectively harming the financier. The problem revolves around two parameters from real estate finance – the probability that the distress leads to foreclosure and resulting foreclosure loss severity for the financier if foreclosure does occur. Previous analysis focuses on reducing the probability that homeowner distress leads to foreclosure. By contrast, the purpose of this paper is to focus on reducing foreclosure loss severity.
Design/methodology/approach
The study develops a new intuitive formula for foreclosure loss severity to quantify its dependence on transaction costs. The study shows that foreclosure loss severity reduction is feasible by introducing a new refinancing instrument that lowers foreclosure transaction costs and applying property law to derive the structure of the refinancing instrument.
Findings
Foreclosure loss severity reduction can subsidize concessions on scheduled payments for homeowners with arbitrarily poor credit without prospective harm to the financier.
Research limitations/implications
Quantification of mortgage distress relief is limited to distressed mortgages described by representative parameter values from various government studies.
Practical implications
For most distressed homeowners, payment and principal reductions could exceed those available from the recent government programs.
Social implications
Implementation should significantly enlarge the pool of homeowners eligible for mortgage distress relief.
Originality/value
The mortgage refinance is qualitatively different from that available under existing government refinance programs because it is based on an arms-length exchange of property rights that makes market sense regardless of whether the refinancing results in subsequent homeowner default.
Illustratively, there can be a securitization system that is comprised of a computer or computers using a network, and a process, for the conversion of assets into marketable securities. In one embodiment, the securitization system includes a distribution system to distribute at least some of the marketable securities generated by the securitization system to one or more buyers. The process may utilize a new definition of securitization that expands the universe of securitizable assets, the universe of asset securitization methodologies, and the respective universes of securities and investment assets that can be designed and generated thereby.
Islamic financial jurisprudence has always had the stated aim of enhancing human welfare, and therefore prohibitions must be seen through the lens of welfare-enhancing regulation of financial practices. In today's age of financial engineering, utilizing many of the legal and financial advances of the past two decades, it is quite easy to synthesize the contracts that classical and contemporary jurists forbade from the ones that they have permitted. This financial engineering approach was always possible to some extent, but recent advances have reduced transaction costs substantially. In premodern societies, when transaction costs of ruses to circumvent prohibitions were substantial, prohibitions could serve their intended regulatory purpose, albeit imperfectly. In today's age of low-cost financial engineering, the regulatory substance of prohibitions, contract conditions, and other contract-based juristic rulings has been diluted to the point of rendering the contract-based jurisprudence incoherent.
We use the Business Roundtable’s challenge to the SEC’s 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access. We find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership in particular, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the Rule in response to the Business Roundtable challenge. We also examine intra-day returns and find that the value loss occurred just after the SEC’s announcement on October 4. We find similar results on July 22, 2011, when the D.C. Circuit ruled in favor of the Business Roundtable. These findings are consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC’s 2010 Rule.
Iwas asked by ISNA to produce a short guide to Islamic Banking and Finance for the Muslims of North America. To keep this guide short, we had to de ne our target audience rather carefully. This introductory guide is meant to address the Muslim who is familiar with the fundamental tenets and sources of legislation in Islam. The reader is not assumed to have elaborate prior knowledge of Islamic nancial contracts, but a certain degree of nancial sophistication will be required. This is not a full survey of the eld, and it is not a religious guide. It is the work of a single individual, who does not claim any religious authoritybeyond that which is derived from quoted texts. I tried my utmost to steer away from issues which are or may become controversial. Therefore, I have been careful to limit the discussion of recent fatwas and decisions of jurists and juristic councils. In that sense, this guide falls short of providing the reader with full information about \state of the art " Islamic nancial instruments. This apparent shortcoming is intentional. The eld of contemporary Islamic
Executive Summary. The concept of securitization can be standardized by focusing on its effect on investment characteristics rather than its effect on assets. The effect on investment characteristics impacts asset value. Al- though recent advances in securitization technology apply to the securitization of fixed-income assets, secur- itization has long been the primary investment bank- ing function. Wide variation in securitization method- ology reflects wide variation in asset investment characteristics.
The Problem to be ExaminedThe Reciprocal Nature of the ProblemThe Pricing System with Liability for DamageThe Pricing System with No Liability for DamageThe Problem Illustrated AnewThe Cost of Market Transactions Taken into AccountThe Legal Delimitation of Rights and the Economic Problem
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