| |
| |
| 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 | |