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29 Cards in this Set

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  • 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)