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Unformatted text preview: have occurred during the preceding year for
borrowers with a FICO score of less than 550; provided, however,
that a Chapter 7 bankruptcy for a borrower with a FICO score in
excess of 550 (or 580 under the stated income documentation
program) may have occurred as long as such bankruptcy is
discharged at least one day prior to funding of the loan. ...
This was the AA risk! Credit Quality of Borrowers Under the C- risk category, an applicant must have a FICO score
of 500, or greater. Unlimited 30, 60 and 90 day late payments and
a maximum of one 120 day late payment is acceptable on an
existing mortgage loan. An existing mortgage loan must be less
than 150 days late at the time of funding of the loan. Why would you not care about borrow credit quality? Going up to 2006, there was unprecedented home price
appreciation (HPA). Who cares about credit quality when you have enough collateral?
Especially if you think that collateral is relatively liquid.
As long as HPA remained high (or least not negative), these
investments were very solid. 220
200 Los Angeles
Composite 20 180
1985 1990 1995 2000
Year 2005 2010 Who buys this garbage? If you are a money market fund you can buy t-bills or you can buy
the best part of this $2B mortgage pool that all the credit rating
agencies say is AAA and get LIBOR + 0.13%. This was called
reaching for yield. If we are trying to construct a portfolio with a maximum chance of
loss of 1% and the lowest price possible (i.e. highest yield), how
should we do it? Look for the worst possible state of the economic
to be the default state. Example Say we agree that:
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This document was uploaded on 10/28/2013.
- Spring '13