Topic · Core Finance & Asset Classes
← All topicsSecuritization
40 articles · 7 checkpoints · 23 deeper reads · 10 reference notes
A standalone topic: it is on no roadmap, so read it on its own terms.
Every article, in reading order
plant a flag as you finish eachRead these first
Turning a pile of illiquid loans into tradeable bonds sounds like financial engineering for its own sake. It exists because it solves a real, boring problem, a lender running out of capacity to lend, and every later refinement is just a better way to sell that idea to investors.
A pool of risky loans can still fund an AAA bond, if enough cushion is built underneath it. Credit enhancement is the collection of techniques for building that cushion, and knowing the size of it is how you check whether a rating actually makes sense.
A pass-through pays investors a pro-rata share of whatever a mortgage pool collects each month. The pool factor is the one number that tracks how much of the original loan balance is still alive to pay it, and it is the first thing anyone checks before touching a pool.
Agency MBS mostly trade without anyone knowing which specific loans they are buying. That strange arrangement, TBA trading, is what makes the market liquid, and it opens the door to a financing trade, the dollar roll, that can be worth more than the coupon itself.
The same pool of loans can fund a AAA bond and a junk bond at the same time, just by deciding who gets paid first. The waterfall is the rulebook for that ordering, and it is the single document that turns one cash flow into many different risk profiles.
An ABS CDO repackaged the riskiest slices of mortgage bonds into new AAA-rated bonds, on the assumption that those risky slices wouldn't all go bad together. When housing fell nationally instead of regionally, that assumption failed everywhere at once, and so did the ratings built on it.
A plain mortgage pass-through hands its uncertainty straight to the investor. A CMO redistributes that same uncertainty instead of removing it, carving out tranches with stable, predictable schedules by loading all the volatility onto other tranches that absorb it.
Then the rest