Which of the following describes a typical feature of a non-agency residential mortgage-backed security (RMBS)?
A Senior-subordinate structure in bond classes
B A pool of conforming mortgages as collateral
C A guarantee by the appropriate government sponsored enterprise (GSE)
solution:A
A is correct. Non-agency RMBS are credit enhanced, either internally or exter?nally. The most common forms of internal credit enhancements are senior/sub- ordinate structures, reserve funds, and overcollateralization. Conforming mort?gages are used as collateral for agency (not non-agency) mortgage passthrough securities. An agency RMBS, rather than a non-agency RMBS, issued by a GSE (government sponsored enterprise), is guaranteed by the respective GSE.
B is incorrect because non-conforming (not comforming) mortgages are used as collateral for non-agency mortgage passthrough securities. To be included in a pool of loans backing an agency RMBS, it must meet specified under? writing standards. If a loan satisfies the underwriting standards for inclusion as collateral for an agency mortgage-backed security, it is called a conforming mortgage. If a loan fails to satisfy the underwriting standards, it is called a non?
conforming loan.
C is incorrect because an agency RMBS, rather than a non-agency RMBS, issued by a GSE (government sponsored enterprise), is guaranteed by the respective GSE. The RMBS issued by GSEs are those issued by Fannie Mae (pre?viously referred to as the Federal National Mortgage Association) and Freddie Mac (previously referred to as the Federal Home Loan Mortgage Corporation).