LO 36.7: Explain the implications o f the subprime mortgage meltdown on

LO 36.7: Explain the implications o f the subprime mortgage meltdown on portfolio management.
Currently, the rating agencies collectively monitor approximately 10,000 mortgage pools. It would be impractical to monitor each pool on a monthly basis in detail. It is current practice to annually review each individual pool. An important performance measure used during this review is the loss coverage ratio (LCR), defined as: (current credit enhancement for tranche) / (estimated unrealized losses). An example of a credit enhancement is excess spread. If the LCR is breached (i.e., falls below what is acceptable), a full review is warranted.
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