3 3 not insured by any agency of the us govt may be

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Unformatted text preview: y Agency of the US Govt – may be commercially Not commercially insured Collateralized Mortgage Obligations (CMO); developed by Freddie Collateralized Mac Mac a. b. c. Investors can purchase mortgage assets without having to service loans Transforms otherwise illiquid mortgages into highly marketable Transforms securities securities Also allows investors to sell part of the "option risk" to other investors: Also 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 1. 2. 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 A. B. C. D. E. F. G. Conforming Loans Securitization Collateralized Debt Obligation (CDO) Pass-Through Rates Mortgage-Backed Securities (MBS) Asset-Backed Securities (ABS) VA Loans All Rights Reserved Dr. David P Echevarria 8 HOMEWORK QUESTIONS HOMEWORK A. What are the desirable features of a mortgage? A. B. What are the general features of an Adjustable rate What mortgage? mortgage? C. What are pass-through securities? D. What factors contributed to growth of second What mortgages? mortgages? E. Why are CMO such good investments from the Why 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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