Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
29 Cards in this Set
- Front
- Back
What are mortgage-pass-through securities?
|
mortgages that are purchased then pooled and then used as collateral to issue securities; risk-averse investors prefer investing in a pool because it is considerably more liquid than an individual security
|
|
What is the Government National Mortgage Association Ginnie Mae?
|
function is to use the "full faith and credit of the US government" to support FHA and VA mortgage markets; Fannie Mae divided and one component became Ginnie Mae; do not issue the securites just recieve a guaranteeing fee by permitting lenders to convert individual mortgages into liquid US backed securities; only Federal Housing Administration, Veterans Administration, or Farmers Home Administration can be quaranteed by Ginnie Mae
|
|
What do the Federal Home Loan Mortgage Corporation FHLMC (Freddie Mac)and the Federal National Mortgage Association FNMA (Fannie Mae) do?
|
purchase and pool securities and use them as collateral to issue securities; both are government sponsored enterprises; their guarantee does no carry the full faith and credit of the United States; recieve no government subsidy; their stocks trade on the NYSE
|
|
What are agency pass-through securities?
|
issued by Ginnie Mae, Freddie Mac, Fannie Mae; 98% of pass-through securities are agency pass-through securities
|
|
What are nonagency mortgage pass-through securities?
|
privately issued pass-through securities
|
|
What does the Federal Home Loan Mortgage Corporation do specifically Freddie Mac?
|
issues securities known as particpation certificates (PC); PCs only guarantee timely payment of interest, while principal is guaranteed to be paid back in no later than a year; not guaranteed by US government; provides capital to the residential mortgage market and fosters a secondary mortgage market
|
|
What does the Federal National Mortgage Association do specifically Fannie Mae?
|
promote a secondary market for conventional and FHA/VA single- and multifamily mortgages; not guaranteed by the US government
|
|
What are jumbo loans?
|
mortgage loans that are greater than the maximum permissible loan size
|
|
What is the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA)?
|
improved marketablility of mortgage-related securities earning a double-A quality rating or better; made such securities legal investments for federally chartered banks and thrifts; allowed state-regulated financial institutions to invest in them; opened door to pools of capital
|
|
What is contraction risk?
|
if mortgage rates decline, borrowers will refinance and prepay and this reimbursement at par will not yield the initial cash flow
|
|
What is extension risk?
|
if mortgage rates rise, then investors will want borrowers to prepay now so they can reinvest at higher rates; risk of not being able to reinvest and take advantage of the higher rate; type of prepayment risk
|
|
What are the two types of prepayment risk?
|
1. contraction risk
2. extension risk |
|
What is the conditional prepayment rate (CPR)?
|
assumes that some fraction of the remaining principal is prepaid each year for the remaining term of the mortgage
|
|
What does the Public Securities Association (PSA) prepayment benchmark assume?
|
1. a CPR of 0.2% for the first month, and increase of 0.2% per year per month until it reaches 6% per year
2. a 6% CPR for the remaining year |
|
What is the average life?
|
average time to receipt of principal payments (scheduled principal payments and projected prepayments), weighted by the amount of principal expected; see pg. 458 in book for equation
|
|
What are traches?
|
tranches are different bond classes into which cash flows of mortgage pass-through securities pass; create securities with different exposure to prepayment risk
|
|
What are collateralized mortgage obligations (CMOs)?
|
when cash flows of pools of mortgage pass-through securities are redistributed to different bond classes, the resulting securities are called CMOs; satisfy asset/liability needs of institutional investors; broaden appeal of mortgage-backed products
|
|
What are sequential-pay CMOs?
|
each class of bond is retired sequentially; aka pay-through securities; say interest to each is based on amount of principal outstanding, but principal payments to tranche A first then tranche B and so on; tranche A and B protected from extension risk- have money earlier to reinvest; tranche C and D protected from contraction risk- prepayment goes to principal payments for A and B
|
|
What is an accrual tranche or a Z bond?
|
such a bond class is similar to a zero-coupon bond; the interest that would have been paid to the accrual bond class is used to speed paying down the principal balance of earlier bond classes; shortens final maturity for tranches A, B and C, average lives also shorter; creates shorter and longer term tranches; accrual bond class appeals to investors concerned with reinvestment risk
|
|
What is a planned amortization class (PAC)?
|
has a principal repayment schedule that must be satisfied; prepayment risk is absorbed by support or companion bonds
|
|
What are support bonds?
|
protect PAC bonds by absorbing prepayment rish
|
|
What is the weighted average maturity (WAM)?
|
given prepayment risk, how long until the bond matures
|
|
What are stripped mortgage-backed securities?
|
alters distribution of prinicpal and interest making it unequal; some securities will have a higher price/yield ratio than the pool; means to hedge against prepayment risk
|
|
What is interest-only or IO class?
|
allocates all of interest to one class; recieves no principal payments; 1987 introduced type of stripped mortgage-backed security; wants prepayments to be slowl interest based on principal and prepayments reduce principal; price changes in same direction as interest rates
|
|
What is principal-only or PO class?
|
recieves only the principal; 1987 introduced type of stripped mortgage-backed security; PO is purchased at a discount from par; how quickly the money is returned determines the yield; PO prices rise when interest rates fall
|
|
What are commercial mortgage-backed securities?
|
private entities that do not have any implicit or explicit government guarantee
|
|
What is a multi-property single borrower deal?
|
pool of commercial mortgage loans consists of multiple properties for which there is only one borrower
|
|
What is a conduit-originated deal?
|
collateral is multiproperties with multiple borrowers;
|
|
What are liquidating trusts?
|
deals backed by nonperforming mortgage loans (loans where the borrowers are in default)
|