Portal:Real Economy Project/Glossary

This is a glossary of terms used in the Real Economy Project

Securities

CMBS: commercial mortgage-backed securities.
RMBS: residential mortgage-backed securities.
- Non-agency RMBS: residential mortgage-backed securities that do not necessarily fall within limits set by Federal Housing Financial Authority (FHFA) and "do not qualify as collateral for securities that are issued by Ginnie Mae, Fannie Mae or Freddie Mac".[1]

PPIP: Public-Private Investment Program
- Legacy Securities PPIP: Legacy Securities Public-Private Investment Program, a sub-program of the Public-Private Investment Program.

Asset-backed security (ABS): a security whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can include common payments from credit cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty payments and movie revenues.[2]

Collateralized debt obligations (CDOs): a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs securities are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk. A few academics, analysts and investors such as Warren Buffett and the IMF's former chief economist Raghuram Rajan warned that CDOs, other ABSs and other derivatives spread risk and uncertainty about the value of the underlying assets more widely, rather than reduce risk through diversification. Following the onset of the 2007-2008 credit crunch, this view has gained substantial credibility. Credit rating agencies failed to adequately account for large risks (like a nationwide collapse of housing values) when rating CDOs and other ABSs. Many CDOs are valued on a mark to market basis and thus have experienced substantial write-downs on the balance sheet as their market value has collapsed. [3]

Nonrecourse debt (or nonrecourse loan): a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the difference between the value of the collateral and the loan value becomes a loss for the lender. Thus, non-recourse debt is typically limited to 50% or 60% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower.[4]

Trust Preferred Securities: A security that has both equity and debt char- acteristics created by establishing a trust and issuing debt to it. A company would create a trust preferred security to realize tax benefits, since the trust is tax deductible.^[1]

PPIF: Public-private investment funds. (See the Public-Private Investment Program.)

↑ See the October 2009 report of the Special Inspector General for the Troubled Assets Relief Program.