Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/5

Click to flip

5 Cards in this Set

  • Front
  • Back
SPV
Use of an SPV is critical to the creation of ABS, because the SPV stands between the sponsor of the underlying loans and the issuer (the trust) of the securities. The key structural feature of an SPV, which enables it to insulate the trust from the sponsor, is bankruptcy remoteness. This is normally achieved by a “true sale” of the loans to the SPV by the sponsor. This means that the sponsor no longer has ownership rights to the loans, such that a trustee in bankruptcy of the sponsor would be unable to recover the loans or their proceeds. As a result, the ABS-issuing trust’s ability to pay interest and principal should remain intact even if the sponsor were to fail
credit enhancement
Excess Spread
Excess spread." Sometimes referred to as the "equity" in an ABS transaction, excess spread is the difference between the average coupon (or interest rate) on the underlying loans and the coupon on the ABS. For example, if a pool of auto loans has an average interest rate of 5% and the ABS created from those loans pay a coupon of 4%, the excess spread in the ABS transaction would be 1%. This 1% cushion can be used to cover initial losses or payment delays on the auto loans so that investors are not affected.
credit enhancement
Senior/subordinate" structure
Senior/subordinate" structure. This credit enhancement involves creating different classes of securities in an ABS so that investors in one or more classes of senior securities have priority over the investors in the other, subordinate classes. In other words, losses on the loans would first affect investors in the subordinate securities. Reflecting their respective credit risk, the senior securities would usually receive the highest credit ratings and offer the lowest yields to investors, while the subordinate classes would be rated below that and offer higher yields to investors.
• Financial guarantee. Also known as a "wrap," a financial guarantee is bond insurance purchased by the originator to protect investors against all losses and therefore make the bonds more attractive to investors. Providers include monoline insurance companies, such as MBIA, FGIC and AMBAC, as well as the mortgage agency Fannie Mae.
credit enhancement
Financial guarantee
• Financial guarantee. Also known as a "wrap," a financial guarantee is bond insurance purchased by the originator to protect investors against all losses and therefore make the bonds more attractive to investors. Providers include monoline insurance companies, such as MBIA, FGIC and AMBAC, as well as the mortgage agency Fannie Mae.
credit enhancement
Mortgage Insurance
• Mortgage Insurance ("MI"). Like financial guarantees, mortgage insurance protects investors from losses. However, instead of covering the securities, mortgage insurance covers the individual mortgages. Most commonly purchased by the lender when a mortgage is originated, MI typically covers the first 20-25% of losses on a mortgage. With the advent of subprime mortgages, however, ABS issuers can use MI "pool policies" to add first loss coverage of varying degrees to a collateral pool backing a securitization. Providers include MGIC, Radian, FSA and RMIC.