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Preface | |
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Contributors | |
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Mortgage-Backed Securities (MBS) Products and the Mortgage Market | |
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An Overview of Mortgages and the Mortgage Market | |
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Product Definition and Terms | |
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Mortgage-Loan Mechanics | |
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The Mortgage Industry | |
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The Loan Underwriting Process | |
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Generation of Mortgage Lending Rates | |
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Risks Associated with Mortgages and MBS | |
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The Evolving Roles of the GSEs | |
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MBS Investors | |
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The Sources of Competitive Advantage in Investing in MBS | |
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Fannie Mae and Freddie Mac | |
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Insurers | |
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Total-Return Portfolios | |
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Change in the Competitive Landscape | |
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The Portfolio Meets the Market | |
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Mortgage Pass-Through Securities | |
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Federally Sponsored Mortgage Pass-Through Programs | |
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Pass-Through Cash Flows | |
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Impact of Cash-Flow Variability on Yield and Average Life | |
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Determinants of Prepayment Speeds | |
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Gauging a Pool's Prepayment Risk | |
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Anatomy of the Pass-Through Market | |
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Trading, Settlement, and Clearing Procedures for Agency MBS | |
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TBA Trading: Turning Pool-Specific Securities into Generic Securities | |
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Settlement Procedures for Agency Pass-Throughs | |
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BMA Good Delivery Guidelines | |
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Variance | |
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Trading and Settlement Procedures for Other MBS Products | |
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Clearing Procedures for MBS | |
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Summary | |
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What Happens When an Investor Buys a Mortgage-Backed Security? | |
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What if the Dealer Fails to Deliver | |
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Defining Nonagency MBS | |
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The Nonagency Market | |
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Defining Characteristics | |
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Credit | |
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Distribution of Characteristics | |
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Evolution of Loan and Borrower Characteristics | |
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Credit and Prepayment Performance | |
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Agency Expansion into Nonagency Zones | |
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Summary | |
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Credit Enhancements for Nonagency MBS Products | |
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External Credit Enhancements | |
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Internal Credit Enhancements | |
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Use of Interest-Rate Derivative Intruments | |
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Understanding the Prospectus and Prospectus Supplement | |
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Securities Act Registration Statements: The Disclosure Framework | |
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Disclosures for Form S-3 Registered MBS Offerings | |
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Typical Sections of a Prospectus and Prospectus Supplement | |
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Conclusion | |
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Waterfall Cash-Flow Mechanics in European RMBS | |
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General Forms of Waterfalls | |
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Variations in European RMBS Waterfalls by Country | |
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Combined or Split RMBS Waterfalls: Compare and Contrast | |
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Summary | |
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Alternative Mortgage Products | |
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Exploring the MBS/ABS Continuum: The Growth and Tiering of the Alt-A Hybrid Sector | |
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Exploring the MBS/ABS Continuum: Defining the Risk Space | |
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The MBS/ABS Continuum in the Hybrid Sector | |
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Prepayment and Credit Performance Follow Relative Placement along the Continuum | |
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Deal Structures also Mirror Relative Placement along the Continuum | |
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Sufficient Credit Enhancement to Withstand Multiples of Default Frequency Experienced on Weaker Subprime Mortgages | |
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The Value of Available Funds CAPS | |
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Alt-A Mortgages and MBS | |
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Background | |
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Loan-Level Characteristics | |
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Factors Underlying Prepayment Behavior | |
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Empirical Prepayment Performance | |
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Recent Developments | |
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Fixed-Rate Alt-A MBS | |
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Fixed-Rate Alt-A Collateral | |
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Alt-A Prepayments | |
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Historical Drivers of Prepayments and Defaults | |
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Credit Performance and Enhancement | |
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Practical Portfolio Manager Opportunities and Considerations | |
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Hybrid Adjustable-Rate Mortgages (ARMs) | |
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Popularity and Issuance of Hybrid ARMs | |
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Characteristics of Hybrid ARM Loans | |
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Hybrid ARM Refinance Incentive | |
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Comparing Hybrid ARM S-Curves | |
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Comparing Hybrid ARM Seasoning Curves | |
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Loan-Level Drivers of Hybrid ARMs | |
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Interest-Only (IO) Hybrid ARMs | |
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Jumbo Hybrid ARM Credit Performance | |
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Conclusions | |
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Hybrids: Product, Performance, Investor Base, and Frameworks to Assess Relative Value | |
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Hybrid Origination and Issuance | |
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Securitization of Hybrids | |
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The Hybrid Borrower | |
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Prepayment Profiles of Hybrids | |
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Trading Conventions in the Hybrid Market | |
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Investors in the Hybrid Secondary Markets | |
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A Conceptual Framework for Relative-Value Assessments of Hybrids | |
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Cap Valuations on Hybrids | |
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Index Levels: Implied Forwards and Historical Peaks | |
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Relative Value of Hybrids | |
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Identifying Characteristics/Features of Hybrids | |
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Interest-Only ARMs | |
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Overview of IO ARMs | |
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Credit Implications | |
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Prepayment Experience | |
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Conclusion | |
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Residential Asset-Backed Securities | |
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Market Development | |
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Characteristics of Subprime Borrowers | |
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Prepayment Speeds | |
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Relative-Value Consequences | |
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Key Aspects of Credit Analysis | |
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Structural Considerations | |
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Conclusion | |
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Customized Mortgage-Backed Securities | |
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Historical Perspective | |
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Major Categories of Customized MBS | |
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Determinants of Market Payups | |
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Evaluation of Customized Pools: Current-Yield Approach | |
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Evaluation of Customized Pools: Option-Adjusted Spread Analysis | |
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Measuring the Duration of a Customized Pool | |
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Challenges and Issues in Customized MBS Valuation | |
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The Prepayment and Credit Characteristics of Reperforming FHA/VA Loans | |
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The Process of Delinquency Curing | |
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Prepayments | |
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Credit Fundamentals: Overview | |
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Prepayment-Penalty Mortgage-Backed Securities | |
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Legal Framework for Imposition of Prepayment Penalties | |
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Prepayment-Penalty Loan Structures | |
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The Dynamics of the Prepayment Penalty | |
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Borrower and Lender Dynamics | |
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Prepayment Behavior of Prepayment-Penalty Loans | |
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The Impact of Prepayment Penalties on Security Performance and Duration | |
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Conclusions | |
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Mortgage Derivatives: CMOs and Stripped MBS | |
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Stripped Mortgage-Backed Securities | |
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Overview of the SMBS Market | |
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Investment Characteristics | |
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Summary | |
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PAC Bond Features and Performance | |
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Collars | |
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Effective Collars | |
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PAC Collar Drift | |
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How Likely Is Breaking the PAC Bands? | |
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Pay Order and Average Life Stability | |
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Average-Life Profile versus Option-Pricing Models | |
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Wide Window versus Tight Window | |
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Conclusion | |
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Z Bonds | |
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The Basic Accrual Structure | |
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How the Z Interacts with Other Bonds in the Structure | |
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Accretion-Directed or VADM Bonds | |
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Z Bonds in PAC Companion Structures | |
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Performance of Z Bonds | |
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Conclusion | |
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Companions with Schedules | |
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Companion Basics | |
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Companion TAC Bonds | |
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Reverse TACs | |
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Layered PAC Bonds | |
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Scheduled Companions | |
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Conclusion | |
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Inverse Floating-Rate CMOs | |
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Structural Features | |
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Investment Characteristics | |
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Conclusion | |
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Prepayment Models and Behavior | |
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Overview of Recent Prepayment Behavior and Advances in Its Modeling and Valuation | |
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Generic Model | |
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Modeling Reliability and Accuracy | |
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Overview of Valuation of the Prepayment Option | |
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Prepayment Score | |
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Conclusion | |
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Agency Prepayment Model: Modeling the Dynamics of Borrower Attributes | |
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Housing Turnover | |
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Cash-Out Refinancing | |
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Rate Refinancing | |
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The GNMA Sector: Special Modeling Considerations | |
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Putting It All Together: The Case of the 1992 FNMA 7.5% | |
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The Value of Attribute-Sensitive Prepayment Models | |
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Mortgage-Rate Prediction | |
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Loan-Level Prepayment Models | |
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Minimizing Loan Dispersion | |
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The Full Picture | |
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Loan-Level Modeling | |
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Predictive Strength of Loan-Level Models | |
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Use of Survival Analysis in Loan-Level Modeling | |
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Analyzing Specified MBS Pools Using Agency Enhanced Data and Active-Passive Decomposition | |
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Prepayment Modeling Using Active-Passive Decomposition | |
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Enhanced Agency Data and Prepayment Modeling | |
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Valuation Consequence: A Payup | |
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Prepayment Models to Value Nonagency MBS | |
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Innovative Features: A True Loan-Level Implementation | |
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The Bear, Stearns Nonagency Prepayment Database | |
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The Impact of the Agencies on Nonagency Prepayment Behavior | |
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Defining the Subsectors within the Nonagency Market | |
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Deconstructing Our Nonagency Prepayment Forecast | |
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Defining the Baseline Nonagency Refinancing Profile | |
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Understanding Borrower Self-Selection and Burnout | |
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Modeling Borrower Refinancing Intensity | |
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The Impact of Loan Size on Nonagency Refinancing Behavior | |
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Credit Quality | |
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Rate Premium | |
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Secondary Refinancing Effects: Documentation, Loan Purpose, Occupancy Status | |
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The Yield Curve and Refinancing Transitions | |
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The Value of Updated LTV Ratio Information | |
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Housing Turnover Prepayments: Seasoning and Lock-In | |
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Seasonality | |
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Adverse Selection in Housing Turnover Prepayments | |
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Involuntary Prepayments and Curtailments | |
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Refinancing Efficiency: The Next Frontier | |
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Modeling the Mortgage Rate Process | |
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Model Testing | |
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Conclusion | |
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Model Projected versus Actual Results for Representative Deals | |
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A Prepayment Model for Hybrid Mortgages | |
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Market Background | |
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Modeling Hybrid Prepayments | |
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Summary and Valuation Implications | |
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Modeling Nonprime Mortgage Prepayment, Delinquency, and Default | |
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Modeling Framework | |
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Model-Building Strategy | |
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Adjustable-Rate Analysis | |
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Fixed-Rate Analysis | |
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Other Factors Influencing Prepayments | |
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Collateral Credit Performance | |
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Involuntary Prepayments | |
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Loss Severity and Cumulative Losses | |
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Summary | |
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Portfolio Management Tools and Techniques | |
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Valuation of Mortgage-Backed Securities | |
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Static Valuation | |
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Dynamic Valuation Modeling | |
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Illustrations | |
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Summary | |
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Risk-Neutral Prepayment Modeling and Valuation with prOAS | |
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Prepayment Risk and OAS | |
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Equivalent Risk-Neutral Prepay Model | |
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Stochastic Property of Prepay Risk Factors | |
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A prOAS Pricing Model with Refinancing and Turnover Risk | |
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Determining Prices of Risk: Calibration to TBAs | |
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Valuation of MBS Strips with prOAS | |
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Modernized Greeks | |
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Concluding Remarks | |
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An Option-Theoretic Approach to MBS Valuation | |
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Traditional Approaches to MBS Valuation | |
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An Option-Based Prepayment Model for Mortgages | |
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Valuation of Mortgages | |
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A Closer Look at Leapers and Laggards | |
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Valuation of MBS | |
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Approaches for Measuring the Duration of Mortgage-Related Securities | |
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What Do We Mean by the Term Duration? | |
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Current Approaches to Measuring Mortgage Durations | |
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Comparison of Alternative Duration Measures | |
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Future Approaches to Mortgage Durations | |
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Implications for Investors | |
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Duration and Average-Life Drift of CMOs | |
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Review of Duration and Convexity for Treasuries | |
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Evolution of Average Life for CMOs | |
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Implications for Performance and Risk Management | |
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Conclusion | |
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Managing Against the Lehman Brothers MBS Index: MBS Index Prices | |
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Overview | |
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The Lehman MBS Index and Index Pricing | |
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Calculating the Index Price | |
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Conclusion | |
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Managing Against the Lehman Brothers MBS Index: MBS Index Returns | |
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Overview | |
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Example: Comparing Return Calculations Using Index and PSA Prices | |
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Conclusion | |
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Dollar Rolls | |
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Determination of the Financing Cost | |
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Illustrations of Dollar Roll Agreements | |
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Risks in a Dollar Roll From the Investor's Perspective | |
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MBS Dollar-Roll Automation | |
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Uncovering the Risk-Adjusted Carry in MBS | |
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Uncovering the Risk-Adjusted Carry in TBA | |
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Start with Carry, and Hedge Duration | |
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Move on to Hedging Convexity | |
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Finish with Hedging Long-Term Volatility | |
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The Art of Interpreting the Risk-Adjusted Carry | |
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Summary | |
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Mortgage Credit Quantified | |
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Delinquencies and Defaults | |
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Loss Severity and Losses | |
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Summary | |
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Specified Pool Trades: Ranking the Alternatives | |
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Specified Pool Payups | |
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Prepayment Protection: The Data | |
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Credit Curing | |
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Prepayment Protection: The Ranking | |
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Extension Protection: The Data | |
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Ranking Extension Protection | |
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Nonagency Investor Pools | |
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Conclusion | |
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Analysis of Cleanup Calls | |
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Factors Driving the "Optimal" Call Decision | |
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A Tricky Exercise | |
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Nonagency Call Exercises | |
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Call Decisions by Issuer | |
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Call Decision Timing | |
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Hedging Tools and Approaches | |
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A Three-Factor Approach for Hedging Mortgage-Backed Securities | |
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Yield-Curve Risk and Key Rate Duration | |
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How Interest Rates Change Over Time | |
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How to Implement Three-Factor Hedging | |
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Summary | |
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Mortgage Options | |
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Mortgage Option Markets | |
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Mortgage Option Users | |
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Pricing Mortgage Options | |
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Mortgage Option Risk Characteristics | |
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Conclusion | |
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Decomposing Mortgage Option Duration and Convexity | |
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Mortgage Prepayment Derivatives | |
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Prepayment Derivatives History and Products | |
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Prepayment Derivatives Hedging Applications | |
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Auction Announcements | |
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Conclusion | |
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Hedging IOs and Mortgage Servicing | |
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Growth-Mortgage Servicing Industry | |
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Difficulties in Hedging IOs and MSRs | |
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Hedge Instruments | |
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Hedge Correlations | |
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Measuring Hedge Effectiveness | |
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Empirical Hedge Results | |
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Hedging with TBAs | |
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Use of Options | |
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A Few Additional Comments | |
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Thoughts On Servicing Models | |
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Caveats | |
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Conclusion | |
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Mark-to-Market Methodology, Mortgage Servicing Rights, and Hedging Effectiveness | |
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Approach to Back Testing | |
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Extending the Analysis to Servicing | |
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Alternative Hedge Methodology ("Swap + Mortgage" Hedge) | |
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Conclusion | |
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Monthly Durations and Prepayment Speeds | |
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OAS, Spreads, and Yields Used in Computing Daily Prices | |
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OASs and Key Rate Durations as of 7/31/03 | |
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Prepayment-Linked Notes | |
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Themes and Variations | |
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Why Will Prepayment-Linked Notes Gain Popularity? | |
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Relative Value | |
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Conclusion | |
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Commercial Mortgage-Backed Securities | |
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Commercial Mortgage-Backed Securities | |
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The CMBS Deal | |
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The Underlying Loan Portfolio | |
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The Role of the Servicer | |
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Loan Origination, the Lemons Market, and the Pricing of CMBS | |
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Summary | |
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The Impact of Structuring on CMBS Bond Class Performance | |
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Loan Cash Flow: The Raw Material for CMBS | |
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CMBS Structures | |
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The Impact of Maturity Dispersion | |
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The Impact of Coupon Dispersion | |
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The Impact of Prepayments | |
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The Impact of Defaults | |
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Sample Default Scenarios | |
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Effects of Servicer Modifications on CMBS | |
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Summary | |
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Investment Characteristics of GNMA Project Loan Securities | |
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A Brief History of GNMA Multifamily Pools | |
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Major FHA Project Loan Insurance Programs | |
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Prepayment Behavior of GNMA Multifamily Pools | |
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Default Behavior of GNMA Multifamily Pools | |
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Cumulative Defaults by Production Year and the GNMA Project Loan Default Curve | |
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Recent Breakdown of GNMA Multifamily Prepayments into Defaults, Refinancings with Penalties, and Refinancings without Penalties | |
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The Refinancing History of Health Care Loans Compared with Apartment Complexes | |
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On the Investment Characteristics of GNMA Multifamily Pools and REMICs | |
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CMBS Collateral Performance: Measures and Valuations | |
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Mortgage Loan Default Rates and Loss Severities | |
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Factors Influencing Default Rates and Loss Severity | |
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Age | |
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Default Rate, Loss Severity, and Valuation Issues | |
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Conclusion | |
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Value and Sensitivity Analysis of CMBS IOs | |
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Value Drivers of CMBS IOs | |
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CMBS IO Relative Value | |
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Conclusion | |
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Cash-Flow CDOs for CMBS Investors | |
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Capital Structure | |
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Reinvestment (or Revolving) Period | |
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Cash-Flow Diversion Tests | |
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Preferred-Share Caps and Reverse Turbos | |
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Interest-Rate Hedging | |
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Conclusion | |
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Index | |