Describe the sectors of the residential mortgage-backed securities market
What will be an ideal response?
The residential mortgage market can be divided into two subsectors based on the credit quality of the borrower: prime mortgage market and subprime mortgage market.The prime sector includes (1) loans that satisfy the underwriting standard of Ginnie Mae, Fannie Mae, and Freddie Mac (i.e., conforming loans); and (2) loans that fail to conform for a reason other than credit quality or because the loan is not a first lien on the property (i.e., nonconforming loans). The subprime mortgage sector is the market for loans provided to borrowers with an impaired credit rating or where the loan is a second lien; these loans are nonconforming loans.
The above loans can be securitized in different sectors of the RMBS market. Loans that satisfy the underwriting standard of the agencies are typically used to create RMBS that are referred to as agency mortgage-backed securities (MBS). All other loans are included in what is referred to generically as nonagency MBS. In turn, this subsector is classified into private-label MBS, where prime loans are the collateral, and Subprime MBS, where subprime loans are the collateral. The names given to the nonagency MBS are arbitrarily assigned. Some market participants refer to private-label MBS as "residential deals" or "prime deals." Subprime MBS are also referred to as "mortgage-related asset-backed securities." In fact, market participants often classify agency MBS and private-label MBS as part of the RMBS market and subprime MBS as part of the market for asset-backed securities.
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