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

A mortgage pool of 1,000 loans, each USD 200,000, is securitised into a structure with a 5% equity tranche, a 15% mezzanine tranche (attaching at 5%, detaching at 20%) and an 80% senior tranche. The pool's cumulative loss is 12% of pool principal with no recoveries beyond that already netted. What is the loss borne by the mezzanine tranche as a percentage of the mezzanine tranche's principal, and by the senior tranche?

Mezzanine loses 46.7% of its principal and the senior tranche loses nothing. The USD 24m pool loss first wipes out the USD 10m equity tranche, leaving USD 14m for the USD 30m mezzanine tranche, and senior attaches only at 20%.

  1. AMezzanine loses 46.7% of its principal; senior loses nothingCorrect
  2. BMezzanine loses 80.0% of its principal; senior loses nothing
  3. CMezzanine loses 100% of its principal; senior loses 2% of pool
  4. DMezzanine loses 12.0% of its principal; senior loses nothing

Explanation

Pool is USD 200m. Loss is 12% = USD 24m. Equity (5% = USD 10m) absorbs the first USD 10m. The remaining USD 14m hits mezzanine, whose size is 15% = USD 30m. 14/30 = 46.7%. Senior attaches at 20% so is untouched. Using 12% directly (option D) ignores the equity cushion.

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