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This paper analyses the effect of an interest rate freeze in subprime mortgages on residential mortgage backed securities (RMBS). In particular we study shifts in the portfolio's repayment distributions as well as changes in the payment profile of RMBS-tranches. We show that the positive effects of a rate freeze, e.g. less foreclosures and a stabilizing housing market, can outweigh the negative effect of lower interest income such that investors might be better off.
Abstract
The Impact of an Interest Rate Freeze on Residential Mortgage Backed Securities
Hein, Julia; Weber, ThomasThis paper analyses the effect of an interest rate freeze in subprime mortgages on residential mortgage backed securities (RMBS). In particular we study shifts in the portfolio's repayment distributions as well as changes in the payment profile of RMBS-tranches. We show that the positive effects of a rate freeze, e.g. less foreclosures and a stabilizing housing market, can outweigh the negative effect of lower interest income such that investors might be better off.