Fixed Income: Intro to Asset Backed Securities Flashcards
Agency RMBS
In the United States, securities backed by residential mortgage loans and guaranteed by a federal agency or guaranteed by either of the two GSEs (Fannie Mae and Freddie Mac)
Amortizing Loan
Loan with a payment schedule that calls for periodic payments of interest and repayments of principal
Asset-backed securities
A type of bond issued by a legal entity called a special purpose entity (SPE) on a collection of assets that the SPE owns. Also, securities backed by receivables and loans other than mortgages.
Average Life
A measure that gives investors an indication of how long they can expect to hold the MBS before it is paid off; the convention-based average time to receipt of all principal repayments.
Collateral Manager
Buys and sells debt obligations for and from the CDO’s portfolio of assets (the collateral) to generate sufficient cash flows to meet the obligations to the CDO bondholders.
Collaterized Debt Obligation
Generic term used to describe a security backed by a diversified pool of one or more debt obligations.
Collateralized mortgage obligation
A security created through the securitization of a pool of mortgage related products (mortgage pass-through securities or pools of loans)
Contract rate
The interest rate on a mortgage loan
Contraction risk
The risk that when interest rates decline, the security will have a shorter maturity than was anticipated at the time of purchase because borrowers refinance at the new, lower interest rates.
Credit tranching
A structure used to redistribute the credit risk associated with the collateral; a set of bond classes created to allow investors a choice in the amount of credit risk that they prefer to bear
Early repayment option
Contractual provision that entitles the borrower to prepay all or part of the outstanding mortgage principal prior to the scheduled due date when the principal must be repaid
Extension risk
The risk that when interest rates rise, fewer prepayments will occur because homeowners are reluctant to give up the benefits of a contractual interest rate that now looks low. As a result, the security becomes longer in maturity than anticipated at the time of purchase.
Foreclosure
Allows the lender to take possession of a mortgaged property if the borrower defaults and then sell it to recover funds.
Interest-only mortgage
A loan in which no scheduled principal repayment is specified for a certain number of years
Loan-to-Value ratio
The ratio of a property’s purchase price to the amount of its mortgage
Mortgage-backed securities
Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.
Mortgage loan
A loan secured by the collateral of some specified real estate property that obliges the borrower to make a predetermined series of payments to the lender
Mortgage pass through security
A security created when one or more holders of mortgages form a pool of mortgages and sell shares or participation certificates in the pool
Mortgage rate
The interest rate on a mortgage loan
Non-agency RMBS
In the United States, securities issued by private entities that are not guaranteed by a federal agency or GSE
Non-recourse loan
Loan in which the lender does not have a shortfall claim against the borrower so the lender can look only to the property to recover the outstanding mortgage balance
Note rate
The interest rate on a mortgage loan
Pass-through Rate
The coupon rate of a mortgage pass through security
Prepayment option
Contractual provision that entities led the borrower to prepay all or part of the outstanding mortgage principal prior to to the scheduled due date when the principal must be repaid
Prepayment penalty mortgages
Mortgages that stipulate a monetary penalty if a borrower prepays within a certain time period after the mortgage is originated.
Prepayment risk
The uncertainty that the timing of the actual cash flows will be different from the scheduled cash flows as set forth in the loan agreements due to the borrowers ability to alter payments, usually to take advantage of interest rate movements.
Recourse loan
Loan in which the lender has a claim against the borrower for any shortfall between the outstanding mortgage balance and the proceed recieved from the sale of the property
Securitization
A process that involves moving assets into a special legal entity, which then uses the assets as a guarantees to secure a bond issue
Securitized assets
Assets that are typically used to create asset-backed bonds; for example when bank securitizes a pool of loans, the loans are said to be securitized.
Special purpose entity
A non-operating entity created to carry out a specified purpose, such as leasing assets or securitizing receivables; can be a corporation, partnership, trusts, limited liability, or partnership formed to facilitate a specific type of business activity.
Subordination
Form of internal credit enhancement that relies on creating more than one bond tranche and ordering the claim priorities for ownership or interest in anal asset between the tranches. The ordering of the claim priorities is called senior, subordinated structure, where the tranches of highest seniority are called senior followed by subordinated or junior tranches.
Support Tranche
A class or tranche in a CMO that protects the PAC tranche from prepayment risk
Time tranching
The creation of classes or tranches in an ABS/MBS that possess different (expected) maturities
Weighted Average Coupon Rate
Weighting was the mortgage rate of each mortgage loan in the pool by the percentage of the mortgage outstanding relative to the outstanding amount of all the mortgages in the pool
Weighted average life
A measure that gives investors an indication of how long they can expect to hold the MBS before it is paid off; the convention-based average time to receipt of all principal repayments.
Weighted average maturity
Weighting the remaining number of moments to maturity for each mortgage loan in the pool by the amount of the outstanding mortgage balance
