FRM Part II · FRM Exam Part II · An Introduction to Securitisation
A risk manager reviews a deal where the originator is also the servicer and has sold the loans with no retained interest. Relative to a deal where the originator retains the first-loss tranche, the main concern is:
The main concern is weaker incentives: with no retained interest, the originator bears little loss from poor underwriting or monitoring, creating moral hazard in originate-to-distribute. Retaining the first-loss tranche aligns the originator's interests with investors, which is why risk retention is emphasised.
- ALower prepayment risk due to servicing continuity
- BHigher interest rate risk in the senior notes
- CWeaker incentives for originator screening and monitoring of borrowersCorrect
- DReduced legal isolation of the assets from the originator
Explanation
Without retained exposure, the originator bears little loss from poor underwriting, creating a moral hazard in the originate-to-distribute model. Retaining the first-loss piece aligns interests. The other options are unrelated: true sale determines legal isolation, and the structure does not imply higher rate risk.
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