In addition to prepayment risk, ABSs also have credit risk and therefore require some form of credit enhancement. Got this from reading 58 of the schweser notes. Do the MBSs have this credit risk? There is no review of credit risk in the MBS reading, perhaps only a brief mention in the last LOS on CMBS. Does this not apply to RMBS? Is it only unique to ABS?
Most of the MBSs or CMOs are from government sponsored agencies (Freddie Mac, Fannie Mae), so they have nearly no credit risk.
The loans backed my an MBS are a qualifying agency loans (so no credit risk), the ones that don’t make it to the ‘qualifying’ creiteria are non-qualifying and put in a separate pool from which an ABS could be formed.