FINC314 Lecture Notes - Lecture 33: Special Purpose Entity, Pro Rata, Pseudoscience

• School: University of Delaware
• Department: Finance
• Course: FINC314
• Professor: Danby Peter

Document Summary

This final exploratory note for this evening introduces mortgage-backed securities (mbs), evaluates a couple of derivative types linked to them, and then broadens out the discussion to review the pluses and minuses of financial innovation and engineering. As you are likely aware, mortgages are frequently securitized. It means a bunch of mortgages are pooled together and then new securities are issued that have some claim on that underlying pool of mortgages. There are many different structures which may be utilized; however, all true mbs utilize spes. Spes are special purpose entity conduits, and they are used in securitization to ensure that mortgages are free and clear and can serve as good collateral on these mortgage-backed securities. The most basic type of mbs is the pass-through. Pass-throughs are typically organized as pools (via an. Spe) with an organizer who passes through all mortgage payments (including prepayments) on a pro rata basis.