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.