Lecture 10 Flashcards
(31 cards)
What is a mortgage?
A pledge of property to secure a debt
What are the main categories of mortgage?
- Residential
- Non-residential
What is a mortgagor?
The person who owes money
What is a mortgagee?
The lender
What is a FRM?
Fixed rate mortgage
What is an ARM?
Adjustable rate mortgage
What is a fully amortised mortgage?
Constant monthly payments until maturity
What are the risks affecting mortgagees?
- Interest rate (ARMs)
- Default risk
- Prepayment risk
What is lending without recourse?
Mortgagors can forfeit house & walk away
How can default risk be limited?
- Credit history
- Low loan-to-income ratio
- Low LTV ratio
How does securitisation benefit borrowers?
Lower liquidity premium -> cheaper finance
What is an SPV?
Special purpose vehicle - no gearing limits
What caused sub-prime mortgage lending?
Originate & hold vs originate to distribute
What is pipeline risk?
Some financial institutions held loans which had not yet been securitised or were difficult to sell
What does MBS stand for?
Mortgage backed security
What does CMO stand for?
Collateralised mortgage obligation
What are risks for holders of MBS?
- Government may guarantee against default risk
- Prepayment risk still a problem
What are CMOs for?
Redistributing prepayment risk
What is credit tranching for?
Redistributing credit risk
What was a problem with credit tranching?
Many senior tranches of sub-prime CMOs were given AAA ratings
What are mortgage pass-through strips?
Type of CMO which splits cashflows into IO & PO strips
How does prepayment affect IO strips?
Reduces their value
How does prepayment affect PO strips?
Increases their value
What does ABS stand for?
Asset backed securities
