Handbook of Mortgage-Backed Securities

ISBN-10: 0071460748

ISBN-13: 9780071460743

Edition: 6th 2006 (Revised)

Authors: Frank J. Fabozzi

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Description:

The 6th edition contains all the elements that made previous editions successful, plus 25 new chapters on topics that inclue collateralized mortgage obligations, prepayment derivatives, loan level determinants of repayments, new approaches to MBS valuation, & a survey of non-US mortgage rates.
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Book details

List price: $137.00
Edition: 6th
Copyright year: 2006
Publisher: McGraw-Hill Education
Publication date: 1/11/2006
Binding: Hardcover
Pages: 1272
Size: 6.00" wide x 9.25" long x 2.00" tall
Weight: 4.114
Language: English

Douglas J. Lucas is Executive Director and Head of CDO Research at UBS. He is also Chairman of The Bond Market Association's CDO Research Committee and ranked top three in CDO research in the Institutional Investor's fixed income analyst survey. Lucas has been involved in the CDO market for nearly two decades, having developed Moody's rating methodology for CDOs in 1989.LAURIE S. GOODMAN, PhD, is Managing Director and co-Head of Global Fixed Income Research at UBS. She manages U.S. Securitized Products and Treasury/Agency/Derivatives Research. Goodman has worked on Wall Street for over twenty years and is well regarded by the investor community, having won more #1 slots on the Institutional Investor All-American Fixed Income Team than any other analyst.FRANK J. FABOZZI, PhD, CFA, CPA, is an Adjunct Professor of Finance and Becton Fellow at Yale University's School of Management and a Fellow of the International Center for Finance. Fabozzi is the Editor of the Journal of Portfolio Management.

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