Many articles, relating to subprime lending,
that appear in the media contain terms that are foreign to many local governments
and investors. Below are definitions for a few of the terms:
Asset Backed Commercial
Paper: Commercial Paper is a
short-term IOU issued by companies that promise to repay the loans, typically
within a few weeks to a year. Some commercial paper is asset-backed by
residential mortgages that may include subprime mortgages.
CDOs - Collateralized
Debt Obligations: A security backed
by a pool of bonds, loans and other assets. Some collateralized debt obligations
invest in subprime mortgage bonds.
CDOs Squared -
Collateralized Debt Obligations Squared:
CDOs collateralized by other CDOs.
RMBS - Residential Mortgage-Backed Securities: In the context of subprime lending refers to subprime residential mortgage-backed securities. Subprime RMBS tranches often account for a high proportion of the collateral backing SF CDOs.
SIVs - Structured
SIV-Lite: An investment vehicle that combines certain features of CDOs and SIVs.
A loan granted to a subprime borrower (an
individual with less-than-perfect credit). The interest rate charged is higher
than the prime rate obtainable by those with a good credit rating.
Tranches: A portion of a structured finance obligation with each tranche offering varying degrees of risk. For example a collateralized debt obligation may have mortgage tranches with different maturities and/or risks. CDO tranches are classified as follows: senior (lower risk/lower yield), mezzanine (medium risk/medium yield), and junior/equity (higher risk/higher yield).