Securitization Quiz

Rating Agencies and NRSROs

companies that evaluate and provide ratings for investments. Upon application to the SEC, a rating agency may become a Nationally Ranked Statistical Rating Agency , pursuant to the Credit Rating Agency Reform Act of 2006, which gives additional market acceptance of their ratings. NRSRO are required to post a significant amount of information publicly (on their web sites), including information on their ratings, governance and code of conduct (conflicts) in order to maintain their status. The Dodd Frank Act created additional requirements applicable to these, including separation of the marketing and analytical operations of the company

FHLMC (Freddie Mac

created by Congress in 1970 to provide liquidity, stability and affordability to the U.S. housing market and to serve as a competitor to FNMA. is a GSE that purchases, pools and guarantees pools of mortgage loans (called mortgage backed securities.) It is regulated by the Federal Housing Finance Agency (FHFA) for safety and soundness, and mission.

FNMA (Fannie Mae)

is a GSE founded in 1938 during the Great Depression as part of the New Deal to promote home ownership through the purchase of residential mortgage loans. It was privatized and has been a publicly traded company since 1968. purchases loans from mortgage lenders, pools the loans into mortgage backed securities (MBS) and places its guarantee on the MBS when selling the securities to investors (note: this guarantee is a guarantee of the security, not a guarantee of an underlying loan payment.) MBS are so-called "pass-through" MBS, which passes the income stream through to investors without creating multiple tranches. FHLMC, is regulated by the Federal Housing Finance Agency (FHFA) for safety and soundness, and mission.

SEC

is a federal regulatory agency that regulates various aspects of securitizations, most notably the disclosures and other requirements associated with issuing asset-backed or mortgage-backed securities. Under the Dodd-Frank Act, was charged with writing new rules to improve the securitization process, including the risk retention rule, new rules related to conflicts and rules governing review and disclosure of information provided to investors of asset- and mortgage-backed securities. also regulates NRSROs.

FHA Federal Housing Administration

is a government agency within HUD that provides federal mortgage insurance on loans made by approved lenders. insures mortgages on single family and multifamily homes including manufactured homes. mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.

GSEs Government Sponsord Enterprise

is a privately held corporations with a public purposes (promoting liquidity in the mortgage industry) created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. GSEs historically have carried only the implicit (not explicit) backing of the U.S. Government, so they are not direct obligations of the U.S. Examples of GSEs include: Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal National Mortgage Association (Fannie Mae) - all now regulated by the Federal Housing Finance Agency (FHFA). Fannie Mae and Freddie Mac were taken over by the FHFA in 2008 and are being run in a conservatorship.

ABS (Assetbacked Securities)

is a security representing a claim on cash flows generated off of a pool of any type of asset. MBS and RMBS (below) are types

MBS / RMBS - (Mortgagebacked and Residential Mortgagebacked) Securities

is a type of security (legal instrument representing an interest in an SPV or SPE), which is typically a debt interest like a bond registered with the SEC. represents a claim on the cash flows from mortgage loans through a process known as securitization.

Secondary Mortgage Market

is the market for the purchase of mortgage loans from lenders (originators) for the purpose of pooling the loans in a securitization; it also refers to the market for the purchase and sale of securities (usually debt securities, like bonds) that are collateralized by the value of a pool of mortgage loans.

Conduit (such as mortgage, credit card or other asset conduit)

refers to a business process (or business company) where loan receivables or other financial income streams are purchased from third parties with the goal of earning a profit by repackaging and selling the stream of income from the underlying assets as securities. Thus, is a type of business that specializes in securitization of loans or other types of financial interests.

Risk Retention Rule

rule created by Section 941 of the Dodd Frank Act that requires securitizers (defined as an issuer or sponsor of an MBS or ABS) and originators of mortgages or other assets sold to a securitizer to retain an interest in a portion of the credit risk in any assets transferred, sold, or conveyed by it through the issuance of MBS/ABS. The theory behind this approach is that requiring securitizers and originators to keep some "skin in the game" in the form of these retained interests, will gives these parties an increased incentive to maintain high quality underwriting and risk management practices. The rule does not apply to "qualified residential mortgages" (QRMs) as defined by the Dodd-Frank Act.

GNMA (Ginnie Mae)

s a government owned corporation that supports affordable housing in the U.S. by guaranteeing the timely payment of principal and interest payments on residential of mortgage-backed securities backed by governmentinsured (guaranteed) loans, like FHA and VA loans. securities are the only mortgage-backed securities that are backed by the "full faith and credit" guaranty of the United States government. is not a GSE.

SPV (Special Purpose Vehicle) - Sometimes SPE (Special Purpose Entity)

the entity (a special corporation or trust) created specifically for the purpose of acquiring receivables / income streams (usually secured by assets, like mortgage interests) and issuing securities (usually debt instruments) backed by the assets. Are also sometimes referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. is usually a company created or sponsored by another company with an asset/liability structure and legal status that makes its obligations secure even if the "parent" company goes bankrupt.

Investment Bank

A private financial institution that assists companies with raising capital or debt or offers other services, including advisory services related to the markets. In the securitization process, these operate in the secondary markets as securitizers of various types of loans, and may hold or trade in the securities created by those securitizations.

HUD Housing and Urban Development

A department and agency of the U.S. government that - among other activities - promotes home ownership, with particular emphasis on urban areas. The FHA and Ginnie Mae are located within this

"private label" securitizations.

Alternate loans, including sub-prime and jumbo loans, are mostly sold through private securitizers (like investment banks), typically requiring the securitizer to purchase additional credit enhancements (like an independent insurer) in order to market the securities. These securities are generally sold in tranches that reflect the quality of the claim on the income stream.

Residual

In a securitization, that interest that remains in the SPE/SPV after all the debt securities of the SPE/SPV have been paid. Similar to equity.

Government Insured Mortgage Loans

Mortgage loans originated by private lenders, but explicitly insured by a government agency, such as the VA or the FHA (a part of HUD).

HERA (Housing and Economic Recovery Act of 2008)

The federal legislation passed by Congress in 2008 that (among other actions) created the FHFA as the principal regulator for the GSEs and authorized FHFA to take action in the event of a failure of one or more of the GSEs. Almost immediately after its formation, FHFA placed FNMA and FHLMC into conservatorships, which continue to be in effect in 2017.

Conventional Mortgages

The non-government-insured part of the residential mortgage lending industry in which loans are made by private lenders. When a borrower applies for a home loan, the borrower has the option to apply for a conventional loan or a government-insured loan. Government-insured loans, such as VA and FHA loans, are insured through one of the federal government agencies, while conventional loans are not; however, conventional loans may be insured through private companies called private mortgage insurance companies (PMI companies).

Securitization

The process of converting a future stream of revenue into a security, typically by pooling and selling financial instruments to a special purpose vehicle or trust (known as an SPV or SPE), then issuing securities (rights to the pool), either as a "pass-through" security or in "tranches" of securities that may also be insured, guaranteed or over-collateralized to obtain a higher security rating.

Tranche

an asset- or mortgage-backed securitization, refers to a portion of the securities offered (sometimes referred to as a "slice" of the securities) that receive the same rating, are subject to the same terms and conditions and share the same rights to the underlying assets. may receive different credit ratings as part of a larger securities transaction.

CDOs, CMOs, CLOs and other collateralized pools of assets

are all types of secondary market securities created in the securitization process, which pay investors from the streams of income generated by the various types of assets held. MBS and RMBS (see below) are specialized types

Standard Conventional

high quality loans and government insured loans may be sold to one of the GSEs and packaged into Freddie Mac or Fannie Mae MBS.

FHFA - Federal Housing Finance Agency

was created on July 30, 2008, when the President signed into law the Housing and Economic Recovery Act of 2008 (HERA). The Act gave the authorities necessary to oversee vital components of our country's secondary mortgage markets - Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. mission is to provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. also serves as the conservator of Fannie Mae and Freddie Mac (similar to a receiver in a receivership.)