In a securitization, each trust is divided into tranches, each defined and rated by the degree of subordination protecting its principal from loss.

True: standard descriptions of mortgage securitization (from rating agencies, textbooks or regulators) confirm that a securitization trust's securities are divided into tranches, each defined by its place in the subordination structure and rated mainly on the credit enhancement or subordination protecting its principal. Mostly true: this is broadly correct, but rating also depends substantially on other credit-enhancement forms (overcollateralization, excess spread, insurance), so subordination is the main but not the only factor. Mixed: tranching is accurate, but ratings are described in a way that misrepresents the main basis. Mostly false: the tranching description is accurate in part, but tranches are generally not defined or rated by subordination. False: securitization trusts are not generally tranched in this way.

Set before the research began.

1. E1 Summary Report of Issues Identified in the Commission Staff's Examinations of Select Credit Rating Agencies U.S. Securities and Exchange Commission (Office of Compliance Inspections and Examinations; Division of Trading and Markets; Office of Economic Analysis), hosted as NRC exhibit NRC000060 · July 2008

   “The trust typically issues different classes of RMBS (known as “tranches”), which offer a sliding scale of coupon rates based on the level of credit protection afforded to the security.”

2. E2 Summary Report of Issues Identified in the Commission Staff's Examinations of Select Credit Rating Agencies U.S. Securities and Exchange Commission (Office of Compliance Inspections and Examinations; Division of Trading and Markets; Office of Economic Analysis), hosted as NRC exhibit NRC000060 · July 2008

   “The primary source of credit enhancement is subordination, which creates a hierarchy of loss absorption among the tranche securities.”

3. E3 Chicago Fed Letter: The role of securitization in mortgage lending Federal Reserve Bank of Chicago (Chicago Fed Letter No. 244, hosted on FRASER) · November 2007

   “All privately issued securitizations are rated by the bond rating agencies. A rating is based on the agencies’ assessments of the risk of the particular bond, so different classes of bonds in the same structure can have different ratings.”

4. E4 Chicago Fed Letter: The role of securitization in mortgage lending Federal Reserve Bank of Chicago (Chicago Fed Letter No. 244, hosted on FRASER) · November 2007

   “Traditionally, subordination is more common in prime (jumbo) MBSs, while subprime and Alt-A MBSs are more often structured to include”

The 2008 SEC staff report says securitization trusts issue classes of RMBS known as tranches, distinguished by the level of credit protection each has (E1). It also says subordination is the primary source of credit enhancement and creates a hierarchy of loss absorption among the tranches (E2). The Chicago Fed confirms that different classes in the same structure get different ratings based on risk (E3), and notes that subprime and Alt-A deals often use other structures beyond subordination (E4). Taken together, subordination is the main basis for defining and rating tranches but not the only one, which fits the "mostly true" criterion.