Subprime Glossary

 

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.


ABS - Asset-Backed Securities:  Bond or Note collateralized by a pool of assets.
 

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.


SF CDOs - Structured Finance Collateralized Debt Obligations:
  CDOs backed primarily by asset-backed securities and mortgage-backed securities.
 

SIVs - Structured Investment Vehicles:  An SIV is an ongoing entity, a fund, that invests in high yield long-term assets backed securities like CDOs.
 

SIV-Lite:  An investment vehicle that combines certain features of CDOs and SIVs.


SPVs - Special Purpose Vehicles:
  Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.


Synthetic Collateralized Debt Obligations:
  Synthetic collateralized debt obligations are CDOs backed by a pool of derivatives such as credit defaults swaps rather than bonds or loans.
 

Subprime Loan:  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).


For further information on the subprime market (if you don't mind raunchy language) see the "Subprime Primer."

 

 

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