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

In a residential mortgage securitisation, the originator sells the loans to an SPV but continues to collect borrower payments and handle arrears for a fee. An investor asks which party's performance most directly affects the timing and amount of cash passed to the SPV during borrower distress. Which party is it?

The servicer is the key party. It collects borrower payments, manages arrears and runs recovery processes, so its operational quality and incentives directly determine how much cash reaches the SPV and when, especially when borrowers are stressed.

  1. AThe rating agency
  2. BThe servicerCorrect
  3. CThe underwriter of the notes
  4. DThe external auditor of the SPV

Explanation

The servicer collects payments, manages delinquencies, and pursues workouts and foreclosures. Its competence and incentives therefore drive collections and recoveries. Rating agencies opine on risk, underwriters distribute notes, and auditors review financial statements; none handle the cash collection.

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