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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A bank pools 20,000 prime residential mortgage loans and transfers them to a special purpose vehicle, which issues pass-through certificates whose investors receive a pro rata share of all principal and interest collected, net of servicing fees. Which product does this describe?

This is a pass-through mortgage-backed security. Investors hold pro rata claims on the principal and interest collected from the mortgage pool, net of fees, without seniority tranching. CLOs and CDOs tranche credit risk, and covered bonds keep recourse to the issuing bank.

  1. AA collateralised loan obligation with a senior-mezzanine-equity tranche structure
  2. BA mortgage-backed security of the pass-through typeCorrect
  3. CA synthetic CDO referencing a basket of credit default swaps
  4. DA covered bond with recourse to the issuing bank's balance sheet

Explanation

Pass-through certificates give investors a proportional claim on the mortgage pool's cash flows, with no tranching by seniority. That is the defining feature of a pass-through MBS. A CLO has tranched claims on leveraged loans, and a covered bond remains on the issuer's balance sheet with recourse.

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