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Unformatted text preview: y Agency of the US Govt – may be commercially
insured Collateralized Mortgage Obligations (CMO); developed by Freddie
c. Investors can purchase mortgage assets without having to service loans
Transforms otherwise illiquid mortgages into highly marketable
Also allows investors to sell part of the "option risk" to other investors:
Accomplished by rebundling the cash flow pool
rebundling All Rights Reserved Dr. David P Echevarria 6 MORTGAGE-BACKED SECURITIES
C. Mortgage Pools - Sources of Risk
3. Interest Rate (market value behaves like bonds)
Prepayment (reduces yields)
Credit (sub-prime mortgage problem) All Rights Reserved Dr. David P Echevarria 7 Supplemental Information on Mortgages
See Phase 2 Lecture Notes
G. Conforming Loans
Collateralized Debt Obligation (CDO)
Mortgage-Backed Securities (MBS)
Asset-Backed Securities (ABS)
VA Loans All Rights Reserved Dr. David P Echevarria 8 HOMEWORK QUESTIONS
A. What are the desirable features of a mortgage?
B. What are the general features of an Adjustable rate
C. What are pass-through securities?
D. What factors contributed to growth of second
E. Why are CMO such good investments from the
default point of view?
F. Why do mortgage investors want good loan-toF.
market value ratios?
All Rights Reserved Dr. David P Echevarria 9...
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- Fall '09