Mortgage-Backed Securities Overview Flashcards
7 cards from real CMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Mortgage-Backed Securities Overview flashcards as text
What is the primary function of 'credit enhancement' in a non-agency MBS structure?
Answer: To protect senior tranche investors from credit losses in the pool
Credit enhancement — via subordination, overcollateralization, or third-party guarantees — absorbs losses before they reach senior MBS tranches.
Under SEC Regulation AB, what must MBS issuers disclose in shelf registration filings?
Answer: Detailed asset-level data, static pool data, and representations and warranties
Reg AB requires comprehensive disclosure of loan-level data, pool performance history, and the representations sellers make about loan quality.
What does 'seasoning' refer to in the context of a mortgage pool within an MBS?
Answer: The age of the loans — how long they have been outstanding
Seasoning refers to the weighted average loan age (WALA); more seasoned pools typically have more predictable prepayment behavior.
Which scenario would most likely cause the spread between agency MBS and U.S. Treasuries to widen significantly?
Answer: Heightened market uncertainty and risk-off sentiment
Risk-off episodes push investors toward Treasuries, increasing demand for government bonds but reducing MBS demand, widening the spread.
In CMO structuring, what role does the 'support' (companion) tranche play?
Answer: It absorbs prepayment variability to protect PAC tranches
Support tranches absorb excess or deficient prepayments so that PAC tranches receive principal within their scheduled payment bands.
What is the key characteristic of a 'sequential-pay' CMO structure?
Answer: Principal is paid to the first tranche until retired, then to the next tranche in sequence
Sequential-pay CMOs direct all principal payments to the shortest tranche until it is fully retired, then shift to the next tranche, creating tranches with different average lives.
Which factor most directly determines whether a borrower is likely to prepay a mortgage within an MBS pool?
Answer: The spread between the borrower's note rate and current refinance rates
Borrowers refinance when current market rates fall sufficiently below their existing note rate to justify the costs, making rate differential the primary prepayment driver.