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Prentice Hall Frank Fabozzi Bond Markets Analysis_5

Tham khảo tài liệu 'prentice hall frank fabozzi bond markets analysis_5', tài chính - ngân hàng, đầu tư chứng khoán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | 238 CHAPTER l i Mortgage Pass-Througl specified level for example 10 . The most common forms of external enhancements are 1 a corporate guarantee 2 a letter of credit 3 pool insurance and 4 bond insurance. Pool insurance policies cover losses resulting from defaults and foreclosures. Poli-cies are typically written for a dollar amount of coverage that continues in force throughout the life of the pool. However some policies are written so that the dollar amount of coverage declines as the pool seasons as long as two conditions are met 1 the credit performance is better than expected and 2 the rating agencies that rated the issue approve. Because only defaults and foreclosures are covered additional insurance must be obtained to cover losses resulting from bankruptcy i.e. court-mandated modification of mortgage debt fraud arising in the origination process and special hazards i.e. losses resulting from events not covered by a standard homeowner s insurance policy . Bond insurance provides the same function as in the municipal bond structures. Typically bond insurance is not used as the primary protection but to supplement other forms of credit enhancement. The rating of the third-party guarantor must be at least as high as the rating sought. Thus if the third-party guarantor has a single A rating a triple A rating for the asset-backed security cannot be obtained by using only this guarantee. The disadvantage of a third-party guarantee is that the rating agencies take a weak link approach when assigning ratings. If the rating of the third-party guarantor is downgraded the security s rating will be downgraded even if the collateral is performing as expected. Therefore it is imperative that an investor perform credit analysis on both the collateral the loans and the third-party guarantor. I 1 . Internal Credit Enhancements Internal credit enhancements come in more complicated forms than external credit enhancements and may alter the cash flow characteristics of the .