Sunday, May 4, 2008

Mortgage Securitization Glossary

Asset-Backed Security (ABS) - securities backed by specific assets, payments on which derived from cash flows of underlying assets, such as auto loans, credit card receivables, home equity loans, and student loans.

Bankruptcy Remote Structure- technique used to isolate assets or loans from the bankruptcy risk of the company financing or selling them. For example, a loan originator may transfer its loans to a special purpose entity (SPE) which which issue securities backed by the loans. The transfer of the loans to the SPE is designed to be a "true sale" to place them outside of the originator's bankruptcy estate if it end up in bankruptcy.

Collateralized Mortgage Obligation(CMO) - series of securities created by dividing the cash flows from a pool of mortgage loans into various serially maturing tranches of securities.

Conforming Mortgage Loan - a mortgage loan that satisfies the guidelines of Fannie Mae or Freddie Mac. Generally are of prime quality and below the threshold amount set each year by the federal government.

Credit Enhancement - techniques used to improve the credit quality of a security to obtain a high rating. Securitizations use credit enhancement to obtain AAA ratings for their senior classes of securities. One technique is overcollateralization, the par amount of securities issued is less than the total amount of the underlying assets being securitized. Another is a guarantee by a bond insurer.

Credit Rating - an evaluation of the credit quality of a security generally expressed with symbols such as "AAA" or Aaa". The best known are Moody's, S&P, and Fitch.

Mortgage Backed Security (MBS) - securities backed by a pool of mortgage loans. Payments on the MBSs are derived from the cash flows produced by the underlying mortgage loans.

Negative Amortization - a loan where the principal balance increases over time as the monthly payment is not sufficient to fully cover the accrued interest.

Originator - originators of mortgage loans that sell them to other companies that pool them into securities.

REMIC - Real Estate Mortgage Investment Conduit, a tax classification applicable to CMOs under the Internal Revenue Code

Retained Interest - the most subordinated claim in a pool of securitized assets, generally retained by the sponsor of the securitization.

Securitization - financing tool in which a company raises money by issuing securities backed by specific assets such as mortgage or car loans. The cash flow from the underlying assets is the source of the funds for the issuer to make payments on the securities.

Servicer - an entity that collects payments on securitized assets such as mortgages and administers securitization transactions. Various types of servicers are the primary servicer, the master servicer, the sub-servicer, and the special servicer.

Special Purpose Vehicle - an entity formed to hold the assets being securitized.

Subprime Borrowers - borrowers with credit histories with significant delinquencies, defaults, or bankruptcies. Distinguished from "prime-quality" borrowers.

Tranche - from the French meaning "slice", refers to one of the various classes of securities issued in securitization.
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