Residential Mortgage-Backed Securities (RMBS)

A below investment grade publicly traded company has securitized USD 100 million of its conforming residential mortgage assets through a wholly owned subsidiary trust company. The trust company established three sequential pay tranches with attractive credit enhancements. Assuming that the trust company's officers embezzle funds, which of the following is _least likely_ to occur?

Incorrect. Most often, when a subsidiary has drawn negative attention, the result is negative views of the parent company. If shareholders believe that the company's expected earnings will decline as a result of the unethical behavior, share price will likely decline.

Correct. The residential mortgage–backed securities are agency backed and have financial guarantees from either the US federal government or a government-sponsored enterprise. Agency residential mortgage–backed securities are backed by only conforming loans.

Incorrect. The trust company's debt credit rating will likely be negatively impacted as a result of unethical financial activity within the special purpose entity.

The stock price declines

Cash flows to the securities' holders decline

The credit rating on the trust company is downgraded