Is B TRUE? If not…why? Which of the following is TRUE for securities backed by closed-end home equity loans? A) Prepayments are not allowed. B) The securities in those deals are typically floating-rate tranches. C) The security holders only receive interest and no principal payments. D) The prepayment benchmark is issuer specific. Your answer: B was incorrect. The correct answer was D) The prepayment benchmark is issuer specific. Unlike the PSA benchmark, the prepayment benchmark speed in the prospectus is issuer specific.
Closed end HEL’s have basically the same structure as a standard fixed rate mortgage.
My understanding was they had the same structure in that they were amortizing, but most are floating rate loans. So that is wrong?
This one seems shaky. I’m looking @ it in schweser now and it says that they do have floating rates, but the rates are capped. Even the caps themselves are floating, however. The only issue may be that the answer choice specifically mentions the tranches…which may be different?
They can be tranched too. I think this is just a bad question. D is definitely right, but I think B is too.
I think B would be right it were open-ended…like a Home Equity Line of Credit…
I guess I will look it up in the CFAI texts to see if they elaborate.
This is what I remember from FI. If the issue is tranched then, depending on the tranch, you could be paid either a Fixed or floating rate. For example, if you owned the senior portion then the rate is fixed but if you are a mezz holder the rate is floating.