Mortgage-Backed Security (MBS) Instrument and Market Features Flashcards
What is “Prepayment Risk”?
The risk that the principal or proportion of the principal is paid back at a different pace from the contractually agreed scheduled payment plan by the borrower.
What is “Contraction Risk”?
The risk that the borrower repays the principal or portion of the principal in a shorter period of time than the contractually agreed scheduled payment, thereby reducing the amount of future payments the investor receives.
What is “Extension Risk”?
The risk that the borrower repays the principal or a portion of the principal in a longer time period that the contractually-agreed scheduled payment.
What is “Time Tranching”?
A structure of a securitization that allows for the redistribution of “prepayment risk” among bond classes by creating bond classes of different expected maturities.
What are “Mortgage-Backed Securities”?
Bonds created from the securitization of mortgages.
What is a Mortgage Loan?
An agreement to finance real estate by the collateral of a specified property that obliges the borrower to make a predetermined series of payments to the lender.
What does “First Lien” refer to?
A security interest in an asset that gives the lender the right to seize the collateral if the borrower does not pay as agreed.
What does “Default” mean?
When a borrower on a mortgage loan fails to meet the obligations of the loan.
What is “Foreclosure”?
An action that allows a lender to take possession of the property and ultimately sell the property to recover funds toward satisfying the outstanding debt reduction.
What does “Loan-to-Value” or LTV refer to?
The ratio of the amount of the mortgage to the property’s value.
The lower the LTV, the higher the borrower’s equity.
From the lender’s perspective, the higher the borrowers equity, the less likely the borrower is to default.
What is the “Debt-to-Income” ratio?
A residential lending metric that compares an individuals monthly debt payments to their monthly pre-tax gross income.
What are “Prime Loans”?
Lending made to borrowers of high credit quality with strong employment and credit histories, a low DTI, substantial equity in the underlying property, and a first-lien on the mortgaged property service as the collateral for the loan.
What are “Subprime Loans”?
Lending to borrowers with lower credit quality, high DTI, and/or are loans with higher LTV, and includes loans that are secured by second liens, otherwise subordinated to other loans.
What is an “Agency RMBS”?
Securities created by the pooling of residential mortgage-backed securities in the United States by either Fannie Mae or Freddie Mac.
These RMBS carry the full faith and credit of the government, essentially a guarantee with respect to timely payment of interest and repayment of principal.
What is a “Non-Agency RMBS”?
An MBS backed by residential mortgages that are issued by private entities and not guaranteed by a federal agency or a GSE.
