Page 81 - FINAL CFA SLIDES DECEMBER 2018 DAY 14

Session Unit 15:
Non-Agency RMBS, p87 53. Introduction To Asset-Backed Securities

As they not guaranteed by the government, their credit quality depends on the borrowers as well

as the characteristics of the loans, such as their LTV ratios. It is usually credit enhanced depending
the credit rating desired by the issuer and based on advice from Rating Agencies!

Credit tranching (subordination) is used to enhance the credit quality of senior RMBS securities using a
shifting interest mechanism to addressing a decrease in the level of credit protection provided by

junior tranches as prepayments or defaults occur in a senior/subordinated structure. If prepayments
or credit losses decrease the credit enhancement of the senior securities, the shifting interest
tanties
mechanism suspends payments to the subordinated securities for a period of time until the credit
quality of the senior securities is restored.

LOS 53.g: Describe characteristics and risks of commercial mortgage-backed securities., p87

Commercial mortgage-backed securities (CMBS) are backed by income-producing real estate, e.g:
• Apartments (multi-family).

• Warehouses (industrial use property).
• Shopping centers. • Whilst Residential MBS loans are repaid by homeowners,
• Office buildings. commercial MBS loans are repaid by real estate investors
• Health care facilities. who, in turn, rely on tenants and customers to provide the
• Senior housing. cash flow to repay the mortgage loan.

• Hotel/resort properties.