CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features
Compared with an agency RMBS, a non-agency RMBS backed by prime jumbo mortgages most likely:
Investors in non-agency RMBS bear the credit risk of the underlying borrowers. There is no agency or government-sponsored guarantee, and jumbo loans exceed conforming limits, so structural credit enhancement is needed to obtain higher ratings for senior tranches.
- Aexposes investors to credit risk of the underlying borrowersCorrect
- Bcarries a guarantee of timely payment from a government-sponsored enterprise
- Chas no need for credit enhancement because the loans are conforming
Explanation
Non-agency RMBS lack an agency guarantee, so investors bear credit risk, which is why enhancement such as subordination is used. Jumbo loans exceed conforming limits, so they are not eligible for agency pools.
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