Introduction to Asset- Backed Securities Flashcards
The parties to a securitization include the seller of the collateral (pool of loans),
the servicer of the loans, and ________. The ____ is bankruptcy remote, which plays a pivotal role in the securitization.
the special purpose entity (SPE), SPE
__________ is the uncertainty that the actual cash flows will
be different from the scheduled cash flows as set forth in the loan agreements because borrowers may choose to repay the principal early to take advantage of interest rate movements
Prepayment risk
In the United States, there are three sectors for securities backed by residential mortgages:
(1) those guaranteed by a federal agency (Ginnie Mae) whose
securities are backed by the full faith and credit of the US government, (2) those
guaranteed by a GSE (e.g., Fannie Mae and Freddie Mac) but not by the US
government, and (3) those issued by private entities that are not guaranteed by
a federal agency or a GSE. The first two sectors are referred to as agency residential mortgage- backed securities (RMBS), and the third sector as non- agency
RMBS.
A__________ is created when one or more holders of
mortgages form a pool of mortgages and sell shares or participation certificates in the pool. The cash flow of a _________ depends on the cash flow of the underlying pool of mortgages and consists of monthly mortgage payments representing interest, the scheduled repayment of principal, and any prepayments, net of servicing and other administrative fees.
mortgage pass-through security
Market participants measure the prepayment rate using two measures: ________
For MBS, a measure widely
used by market participants to assess is the weighted average life or simply the
average life of the MBS
the single monthly mortality rate (SMM) and its corresponding annualized rate—
namely, the conditional prepayment rate (CPR).
Market participants use the ________prepayment
benchmark to describe prepayment rates. A PSA assumption greater than 100 PSA means that prepayments are assumed to occur faster than the benchmark, whereas a PSA assumption lower than 100 PSA means that prepayments are assumed to occur slower than the benchmark.
Public Securities Association (PSA)
Prepayment risk includes two components: _________ and ____________.
The former is the risk that when interest rates decline, the security will have a shorter maturity than was anticipated at the time of purchase because homeowners will refinance at the new, lower interest rates. The latter is the risk that
when interest rates rise, fewer prepayments will occur than what was anticipated at the time of purchase because homeowners are reluctant to give up the
benefits of a contractual interest rate that now looks low.
contraction risk, extension risk
The creation of a ____________ can help manage prepayment risk by distributing the various forms of prepayment risk among
different classes of bondholders.
collateralized mortgage obligation (CMO)
Non-agency RMBS share many features and structuring techniques with agency
CMOs. However, they typically include two complementary mechanisms.
First,
the cash flows are distributed by rules that dictate the allocation of interest
payments and principal repayments to tranches with various degrees of priority/seniority.
Second, there are rules for the allocation of realized losses, which
specify that subordinated bond classes have lower payment priority than senior
classes.
Two key indicators of the potential credit performance of CMBS are the _______ and the ___________. The DSC ratio is the property’s annual net operating income divided by the debt service.
debt service- coverage (DSC) ratio
loan-to value ratio (LTV)
At the loan level, four mechanisms offer investors call protection: _______.
prepayment lockouts, prepayment penalty points, yield maintenance charges, and defeasance.
