Subprime Mortgage Credit Derivatives

by Laurie S. Goodman (UBS, New York, USA); Shumin Li; Douglas J. Lucas (UBS, New York, USA); Thomas A. Zimmerman; Frank J. Fabozzi (School of Management, Yale Univ.)

• ISBN13: 9780470392744
• ISBN10: 0470392746
• Format: eBook
• Copyright: 2008-09-01
• Publisher: Wiley

Summary

Mortgage credit derivatives are a risky business, especially of late. Written by an expert author team of UBS practitioners-Laurie Goodman, Shumin Li, Douglas Lucas, and Thomas Zimmerman-along with Frank Fabozzi of Yale University, Subprime Mortgage Credit Derivatives covers state-of-the-art instruments and strategies for managing a portfolio of mortgage credits in today's volatile climate. Divided into four parts, this book addresses a variety of important topics, including mortgage credit (non-agency, first and second lien), mortgage securitizations (alternate structures and subprime triggers), credit default swaps on mortgage securities (ABX, cash synthetic relationships, CDO credit default swaps), and much more. In addition, the authors outline the origins of the subprime crisis, showing how during the 2004-2006 period, as housing became less affordable, origination standards were stretched-and when home price appreciation then turned to home price depreciation, defaults and delinquencies rose across the board. The recent growth in subprime lending, along with a number of other industry factors, has made the demand for timely knowledge and solutions greater than ever before, and this guide contains the information financial professionals need to succeed in this challenging field.

Table of Contents

Preface

About The Authors

Mortgage Credit

Overview of The Nonagency Mortgage Market

Issuance Volumes

Roots Of The 2007-2008 Subprime Crisis

Defining Characteristics Of Nonagency Mortgages

Loan Characteristics

Risk Layering

Agency versus Nonagency Execution

Summary

First Lien Mortgage Credit

Concepts and Measurements of Mortgage Credit

Collateral Characteristics and Mortgage Credit: Assault of the Four Cs in 2006 (Credit, Collateral, Capacity And Character)

The End Game: Foreclosure, REO Timeline, and Severity

The Role of Unobservable in 2006 Subprime Mortgage Credit

Second Lien Mortgage Credit

Two Types of Seconds

Higher Risks in Seconds

Recent Performance

Why Higher Losses?

Summary

Mortgage Securitizations

Features of Excess Spread/Overcollateralization: The Principle Subprime Structure

Excess Spread-Based Credit Enhancement

OC In Alt-A-Land

OC Internal Workings

Summary

Subprime Triggers and Step-Downs

The Step-Down and the Trigger

BBB Stack (on The Knife's Edge)

Effect of Triggers and the Loss Waterline

Sampling the Subprime Universe

2000-2003 Deal Step-Down Summary

Step-Down and Credit Effects

Summary

Credit Default Swaps On Mortgage Securities

Introduction To Credit Default Swap On ABS CDS

Corporate CDS Fundamentals and Terminology

Differences Between Corporate CDS and ABS CDS

Difficulties in ABS CDS

ABS CDS Effect on ABS CDO Management

Two New Types of ABS CDOs

Summary

The ABX and TABX Indices

Background

How a Deal Gets into the Index

Index Mechanics

Index Pricing Over Time

ABX Tranche Trading

TABX Pricing

TABX versus CDOs

Summary

Relationship among Cash, ABCDS, and the ABX

Fundamental Contractual Differences-Single Name ABCDS/ABX Index/Cash

Supply/Demand Technicals

What Keeps The Arbitrage From Going Away?

Summary

Appendix: Importance of ABCDS to CDO Managers

Credit Default Swaps on CDOsCDO CDS Nomenclature

CDO Credit Problems and their Consequences

Alternative Interest Cap Options

Miscellaneous Terms

Cash CDO versus CDO CDS

Exiting a CDO CDS

Rating Agency Concerns on CDOs that Sell Protection via CDO CDS

Summary

Loss Projection and Security Valuation

Loss Projection for Subprime, Alt-A, and Second Lien Mortgages

Two Ways Of Projecting Loss

Default Timing

Steps In Predicting Collateral Losses

Pros and Cons of the Default Timing Curve

Historical Model Fit versus Actual

Default Timing Is Not Equal To Loss Timing

An Alternative Specification

Alt-A And Closed-End Seconds

Summary

Valuing the ABX

Review of Basic Valuation for ABX Indices

Review of Valuation Approaches

Econometric Approach

ABX Valuation

The "Simple" or Do-It-Yourself Approach To ABX Valuation

ABX After Subprime Shutdown

Summary

Appendix: Results of Original "Base" Pricing (And Number of Bonds Written Down) and the New "Shutdown" Estimates

ABS CDO Losses And Valuation

The Mortgage Loan-Mortgage Bond-ABS CDO Chain

Mortgage Deal Losses

Subprime Mortgage Bond Losses

Alt-A, Second Lien, And Prime Mortgage Bond Losses

Aggregating Mortgage Bond Losses In 2006-7 Mezzanine

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