Mortgage-Backed Securities : Products, Structuring, and Analytical Techniques

by Frank J. Fabozzi (School of Management, Yale Univ.); Anand K. Bhattacharya; William S. Berliner

• ISBN13: 9780470047736
• ISBN10: 0470047739
• Format: Hardcover
• Copyright: 2007-07-01
• Publisher: Wiley

Summary

An in-depth look at the latest innovations in mortgage-backed securities The largest sector of the fixed-income market is the mortgage market. Understanding this market is critical for portfolio managers, as well as issuers who must be familiar with how these securities are structured. Mortgage-Backed Securities is a timely guide to the investment characteristics, creation, and analysis of residential real estate-backed securities. Each chapter contains cutting-edge information for investors, traders, and other professionals involved in this market, including discussions of structuring mortgage products-such as agency CMOs and new types of mortgages-and an in-depth explanation of the concept of option-adjusted spreads and other analytical concepts used to assess relative value. Frank J. Fabozzi, PhD, CFA, CFP (New Hope, PA) is the Frederick Frank Adjunct Professor of Finance at Yale University's School of Management. Anand K. Bhattacharya, PhD (Westlake Village, CA) is a Managing Director at Countrywide Securities Corporation. William S. Berliner (Westlake Village, CA) heads the Trade Strategies Group at Countrywide Securities.

Author Biography

Frank J. Fabozzi is Professor in the Practice of Finance in the School of Management at Yale University. Prior to joining the Yale faculty, he was a Visiting Professor of Finance in the Sloan School at MIT. He is a Fellow of the International Center for Finance at Yale University and on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton University. Professor Fabozzi is the editor of the Journal of Portfolio Management and an associate editor of the Journal of Fixed Income. He earned a doctorate in economics from the City University of New York in 1972. In 2002 was inducted into the Fixed Income Analysts Society’s Hall of Fame and is the 2007 recipient of the C. Stewart Sheppard Award given by the CFA Institute. He earned the designation of Chartered Financial Analyst and Certified Public Accountant. He has authored and edited numerous books in finance.

Anand K. Bhattacharya is a Managing Director at Countrywide Securities Corporation (CSC), a wholly owned affiliate of Countrywide Financial Corporation. He joined CSC in 1999, where he is responsible for the management of fixed income research and strategies. Immediately prior to joining Countrywide, he was Managing Director responsible for capital markets, risk management and portfolio management oversight at Imperial Credit Industries Inc (ICII) from March 1998 to January 1999. Prior to his employment at ICII, Dr. Bhattacharya held positions at Prudential Securities Inc. from 1990 to 1998 with the most recent position as Managing Director, Global Head of Fixed Income Research. His prior employment includes positions in fixed income research and product management at Merrill Lynch Capital Markets, Franklin Savings Association and its subsidiaries and Security Pacific Merchant Bank. Dr. Bhattacharya has written extensively in various facets of fixed income analysis and portfolio management. He has authored or coauthored over 65 publications in various academic and professional journals and industry handbooks. He holds a Ph.D. in Finance and Quantitative Methods from Arizona State University.

William S. Berliner is Executive Vice President in charge of the Mortgage Strategies group at Countrywide Securities Corporation. In this capacity, he oversees the generation of relative value analysis and strategies, and writes and edits many of the firm’s reports and publications. He began his career in the Government Operations Department of Bear, Stearns and Co. in 1985. He moved to the Mortgage trading desk in 1987 as a clerk and joined the CMO desk in 1989. He worked on the CMO desk at Bear until 1993, when he left to join Nikko Securities, where he eventually ran CMO trading. He joined Countrywide as a trader in 1996 and moved to the Research Department in early 1998. Mr. Berliner has a BA in Interpersonal Communications from Rutgers College and an MBA in Finance from the Rutgers Graduate School of Business.

Table of Contents

Preface

About the Authors

Introduction to Mortgage and MBS Markets

Overview of Mortgages and the Consumer Mortgage Market

Overview of Mortgages

Mortgage Loan Mechanics

Risks Associated with Mortgages and Mortgage Products

Overview of the Mortgage-Backed Securities Market

Creating Different Types of MBS

MBS Trading

The Role of the MBS Markets in Generating Consumer Lending Rates

Cash Flow Structuring

Prepayment and Default Metrics and Behavior

Measurement of Prepayments and Defaults

Prepayment Convention Terminology

Delinquency, Default, and Loss Terminology

Prepayment Behavior and Performance

Prepayment Behavior

Drivers of Prepayment Activity

Additional Factors Affecting Prepayment Speeds

Prepayment Behavior of “Nonfixed-Payment” Products

Summary

Structuring

Introduction to MBS Structuring Techniques

Underlying Logic in Structuring Cash Flows

Structuring Different Mortgage Products

Fundamentals of Structuring CMOs

Fundamental MBS Structuring Techniques: Divisions of Principal

Time Tranching

Planned Amortization Classes (PACs and the PAC/Support Structure

Targeted Amortization Class Bonds

Z-Bonds and Accretion-Directed Tranches

A Simple Structuring Example

Fundamental MBS Structuring Techniques: Divisions of Interest

Coupon Stripping and Boosting

Floater/Inverse Floater Combinations

Two-Tiered Index Bonds (TTIBs

Excess Servicing IOs

Structuring Private Label CMOs

Private Label Credit Enhancement

Private Label Senior Structuring Variations

The Structuring of Mortgage ABS Deals

Fundamentals of ABS Structures

Credit Enhancement for Mortgage ABS Deals

Factors Influencing the Credit Structure of Deals

Additional Structuring Issues and Developments

Valuation and Analysis

Techniques for Valuing MBS

Static Cash Flow Yield Analysis

Zero-Volatility Spread

Valuation Using Monte Carlo Simulation and OAS Analysis

Total Return Analysis

Measuring MBS Interest Rate Risk

Duration

Convexity

Yield Curve Risk

Other Risk Measures

Illustration of Risk Measures

Summary

Evaluating Senior MBS and CMOs

Yield and Spread Matrices

Monte Carlo and OAS Analysis

Total Return Analysis

Comparing the Analysis of Agency and Private Label Tranches

Evaluating Inverse Floaters

Summary

APPENDIX: An Option-Theoretic Approach to Valuing MBS

Option-Theoretic Models for Valuing MBS

An Option-Based Prepayment Model for Mortgages

Valuation of Mortgages

A Closer Look at Leapers and Laggards

Valuation of MBS

Summary

Index

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