Securitization & Subprime Mortgage Credit (FRM Part 2 2023 – Book 2 – Chapters 17 & 18)

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After completing thes readings you should be able to:
Define securitization, describe the securitization process and explain the role of participants in the process.
Explain the terms over-collateralization, first-loss piece, equity piece and cash waterfall within the securitization process.
Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose vehicle (SPV) and distinguish between the three main SPV structures: amortizing, revolving and master trust.
Explain the reasons for and the benefits of undertaking securitization.
Describe and assess the various types of credit enhancements.
Explain the various performance analysis tools for securitized structures and identify the asset classes they are most applicable to.
Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR), the weighted average coupon (WAC), the weighted average maturity (WAM) and the weighted average life (WAL) for relevant securitized structures.
Explain the prepayment forecasting methodologies and calculate the constant prepayment rate (CPR) and the Public Securities Association (PSA) rate.
Explain the subprime mortgage credit securitization process in the United States.
Identify and describe key frictions in subprime mortgage securitization and assess the relative contribution of each factor to the subprime mortgage problems.
Compare predatory lending and borrowing.