Basel II – Capital Charge for Credit RiskCredit risk is defined as the possibility of losses associated with reduction of credit quality of b...
Securitisation of Subprime Mortgage Credit
This reading is a part of the syllabus for FRM Part 2 Exam in the section ‘Credit Risk Measurement and Management
This paper covers the following:
- An overview of the subprime mortgage securitization process and the seven key informational frictions which arise
- How market participants work to minimize these frictions and speculate on how this process broke down
- A complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending
- The key structural features of a typical subprime securitization
- How the rating agencies assign credit ratings to mortgagebacked securities
- How the agencies monitor the performance of mortgage pools over time.
- It uses the example of a mortgage pool securitized by New Century during 2006.
[gview file="http://www.ny.frb.org/research/economists/ashcraft/subprime.pdf" save=1]
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