Print Chapter 9 notes and short articles, The Role of Securitization in Mortgage Lending (Chicago Fed Letter, Nov. 2007),   (see files below) and bring to class.

EXAM - KNOW incentives to securitize; possible income sources from securitization, and characteristics of  3 types of mortgage-backed securities by timing of payments (pass-throughs, CMOs, MBBs), characteristics to distribute default risk (guarantees, subordination, over-collateralization, excess spread, geographic diversification, and resecuritization into CDOs and SIVs), the role of "skin in the game" in the securitization process, and know characteristics of  loan sales, SLCs and other guarantees, and credit derivatives. 

The new ability-to-pay requirements by the CFPB released on 1/10/13 and effective on 1/10/14 for "qualified mortgages" (QRM) are discussed in the articles below. The requirements define what one has to do to avoid the 5% "skin in the game" requirement for non-qualified mortgages if they are securitized.  Regulators also agreed with the CFPB (10/21/14) on the definition of a QRM and decided there is no 20% down payment alternative requirement as proposed. KNOW:  Lenders can avoid holding 5% of the risk as long as they verify a borrower’s ability to repay the loan and ensure their debt-to-income doesn’t exceed 43%. Loans sold to Fannie and Freddie are effectively exempt from the risk-retention requirement. The final rule also does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.

The following articles discuss settlements related to mortgage loans and mortgage-backed securities.