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]