My Profile

Mos Def Offline Male 

TSR Demigod

Last Activity 25-04-2013

Write a Message

You are not able to post a message.

Showing 1 to 3 of 3

My messages
  1. Hey. Didn't you do IFRM at Cass? Just wondering what sort of grad roles you're going for.
  2. Can you tell me more about the company you are looking for a logo for?
  3. Hi Mos Def,

    I am applying to HSBC Sales Summer Intern in Dubai.

    I will have the AC in London very soon and I would like to have an insight on the kind of tricky or anexpected questions I might have on this occasion.

    Thank you in advance for your help

About Me

  • About Mos Def

    Star Sign
    About me
    A collateralized mortgage obligation (CMO) is a financial debt vehicle that was first created in June 1983 by investment banks Salomon Brothers and First Boston for Freddie Mac. (The First Boston team was led by Dexter Senft[1]). Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the entity, and receive payments according to a defined set of rules. The mortgages themselves are called the collateral, the bonds are called tranches (also called classes), and the set of rules that dictates how money received from the collateral will be distributed is called the structure. The legal entity, collateral, and structure are collectively referred to as the deal.

    The term collateralized mortgage obligation refers to a specific type of legal entity, but investors frequently refer to deals issued using other types of entities such as REMICs as CMOs. Investors in CMOs include banks, hedge funds, insurance companies, pension funds, mutual funds, government agencies, and most recently central banks. This article focuses primarily on CMO bonds as traded in the United States of America.
    Academic Info
    The most basic way a mortgage loan can be transformed into a bond suitable for purchase by an investor would simply to be to "split it". For example, a $300,000 30 year mortgage with an interest rate of 6.5% could be split into 300 1000 dollar bonds. These bonds would have a 30 year amortization, and an interest rate of 6.00% for example (with the remaining .50% going to the servicing company to send out the monthly bills and perform servicing work). However, this format of bond has various problems for various investors

    * Even though the mortgage is 30 years, the borrower could theoretically pay off the loan earlier than 30 years, and will usually do so when rates have gone down, forcing the investor to have to reinvest his money at lower interest rates, something he may have not planned for. This is known as prepayment risk.

    * A 30 year time frame is a long time for an investor's money to be locked away. Only a small percentage of investors would be interested in locking away their money for this long. Even if the average home owner refinanced their loan every 10 years, meaning that the average bond would only last 10 years, there is a risk that the borrowers would not refinance, such as during an extending high interest rate period, this is known as extension risk. In addition, the longer time frame of a bond, the more the price moves up and down with the changes of interest rates, causing a greater potential penalty or bonus for an investor selling his bonds
    Credit Protection

    CMOs are most often backed by mortgage loans, which are originated by thrifts, mortgage companies, and the consumer lending units of large commercial banks. Loans meeting certain size and credit criteria can be insured against losses resulting from borrower delinquencies and defaults by any of the Government Sponsored Enterprises (GSEs) (Freddie Mac, Fannie Mae, or Ginnie Mae). GSE guaranteed loans can serve as collateral for "Agency CMOs", which are subject to interest rate risk but not credit risk. Loans not meeting these criteria are referred to as "Non-Conforming", and can serve as collateral for "private label mortgage bonds", which are also called "whole loan CMOs". Whole loan CMOs are subject to both credit risk and interest rate risk. Issuers of whole loan CMOs generally structure their deals to reduce the credit risk of all certain classes of bonds ("Senior Bonds&quot by utilizing various forms of credit protection in the structure of the deal.

    [edit] Credit Tranching

    The most common form of credit protection is called Credit Tranching. In the simplest case, credit tranching means that any credit losses will be absorbed by the most junior class of bondholders until the principal value of their investment reaches zero. If this occurs, the next class of bonds absorb credit, and so forth, until finally the senior bonds begin to experience losses. More frequently, a deal is embedded with certain "triggers" related to quantities of delinquencies or
    Prepayment Tranching

    The principal (and associated coupon) stream for CMO collateral can be structured to allocate prepayment risk. Investors in CMOs wish to be protected from prepayment risk as well as credit risk. Prepayment risk is the risk that the term of the security will vary according to differing rates of repayment of principal by borrowers (repayments from refinancings, sales, curtailments, or foreclosures). If principal is prepaid faster than expected (for example, if mortgage rates fall and borrowers refinance), then the overall term of the mortgage collateral will shorten, and the principal returned at par will cause a loss for premium priced collateral. This prepayment risk cannot be removed, but can be reallocated between CMO tranches so that some tranches have some protection against this risk, whereas other tranches will absorb more of this risk. To facilitate this allocation of prepayment risk, CMOs are structured such that prepayments are allocated between bonds using a fixed set of rules. The most common schemes for prepayment tranching are described below.

    [edit] Sequential Tranching (or by time)

    All of the available principal payments go to the first sequential tranche, until its balance is decremented to zero, then to the second, and so on. There are several reasons that this type of tranching would be done:

    * The tranches could be expected to mature at very different times and therefore would have different Yields that correspond to different points on the Yield Curve.
    * The underlying mortgages could have a great deal of uncertainty as to when the principal will actually be received since home owners have the option to make their scheduled payments or to pay their loan off early at any time. The sequential tranches each have much less uncertainty.

    [edit] Parallel Tranching

    This simply means tranches that pay down pro rata. The coupons on the tranches would be set so that in aggregate the tranches pay the same amount of interest as the underlying mortgages. The tranches could be either fixed rate or floating rate. If they have floating coupons, they would have formulae that make their total interest equal to the collateral interest. For example, with collateral that pays a coupon of 8%, you could have two tranches that each have half of the principal, one being a floater that pays LIBOR with a cap of 16%, the other being an inverse floater that pays a coupon of 16% minus LIBOR.

    * A special case of parallel tranching is known as the IO/PO split. IO and PO refer to Interest Only and Principal Only. In this case, one tranche would have a coupon of zero (meaning that it would get no interest at all) and the other would get all of the interest. These bonds could be used to speculate on prepayments. A principal only bond would be sold at a deep discount (a much lower price than the underlying mortgage) and would rise in price rapidly if many of the underlying mortgages were prepaid. The interest

My Stats

Total Posts

Visitor Messages

General Information

  • Last Activity 25-04-2013
  • Join Date 24-02-2007

Age 95


Join Date 24-02-2007

Total Posts 6,300

1 Groups My Groups

(1)My Social Groups
New on TSR

What are your A-level predictions?

Join our AS and A2 results day chat thread

Article updates