- Home equity loan for subprime borrower 2. Manufacture home loan
- Z 2. Z
Why OAS for prime borrower in 1, Z for subprime?
oas for both b/c of prepayment options
home equity - OAS - you have a call option available. mfd - Z - because 1. the manufactured housing depreciates too quickly, is usually borrowed by folks with moderate credit - and hence there is not too much value in refinancing this. *very similar to an auto loan***
Manufactured home loans - high depreciating asset, typically low income borrower. Prepayment unlikely.
Do loans to subprime or low quality borrower typically have a prepayment option?
I guess for purposes of the exam, OAS would be appropriate for a subprime borrower, but it wouldn’t reflect reality. This may be extreme, but just think of the current situation. How many banks are willing to lend to subprime borrowers?
I don’t get why we use an OAS for subprime mortgages. I was under the impression that subprime borrowers rarely had the means to refinance so refinancing was less likely to follow the path of interest rates.