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.

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