Question-71: What do you mean by credit enhancements?

Answer: As you know NonAgency RMBS are not backed by the government agency and their credit value needs to be enhanced. And to do that these securities are structured so as to provide credit enhancement that support the credit ratings that they receive.

Question-72: What are the different forms of the RMBS?

Answer: You can consider RMBS in three forms as below

• MBS-Pass-Through:
• Collateralized mortgage Obligations (CMOs)
• Stripped Mortgage Backed Securities

Agency RMBS can be in all three forms. NonAgency RMBS can only be in the CMO form, hence that is always referred as NonAgencyCmo market.

Question-73: Which is the Risk associated with the Agency RMBS?

Answer: Agency RMBS investor can have prepayment risk. In this case the risk is that the borrowers in a mortgage pool (this is common people, who had taken loan from the bank) will prepay their loans when interest rates decline. If you think Prepayment risk is effectively the same as call risk faced by an investor in a callable corporate or municipal bond.

Question-74: What is the risk of the NonAgency RMBS?

Answer: Nonagency RMBS expose investors to both prepayment risk and credit risk, although the major concern by investors in this space is credit risk (because, it is not backed by Government as in case of AgencyRMBS) and to reduce credit risk, credit enhancement is done.

Question-75: What is CMBS (Commercial mortgage-backed securities)?

Answer: As name suggests, these are some way related to commercial property, Commercial mortgage-backed securities (CMBSs) are backed by a pool of commercial mortgage loans on income-producing property apartment buildings, office buildings, industrial properties example warehouses, shopping malls, premium hotels, and health care facilities etc, anything which is commercial in nature. The basic building block of the CMBS transaction is a commercial loan that was originated either to finance a commercial purchase or to refinance a prior mortgage obligation.