Mortgage-Backed Securities E-Book

Frank J. Fabozzi

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Frank J. Fabozzi Series
• Sprache: Englisch

Seitenzahl: 499

Veröffentlichungsjahr: 2011

Beschreibung

An up-to-date look at the latest innovations in mortgage-backed securities Since the last edition of Mortgage-Backed Securities was published over three years ago, much has changed in the structured credit market. Frank Fabozzi, Anand Bhattacharya, and William Berliner all have many years of experience working in the fixed-income securitization markets, and have witnessed many cycles of change in the mortgage and MBS sectors. And now, with the Second Edition of Mortgage-Backed Securities, they share their knowledge on many of the products and structuring innovations that have taken place since the financial crisis and fiscal reform. Written in a straightforward and accessible style, and containing numerous illustrations, this timely guide skillfully addresses the investment characteristics, creation, and analysis of mortgage-backed securities. Each chapter contains cutting-edge concepts that you'll need to understand in order to thrive within this arena. * Discusses the dynamic interaction between the mortgage industry, home prices, and credit performance * Addresses revised valuation techniques in which all non-agency MBS must be treated as credit pieces * Examines the shift in this marketplace since the crisis and the impact on industry and investors Filled with in-depth insights and expert advice, Mortgage-Backed Securities, Second Edition offers you a realistic assessment of this field and outlines the products, structures, and analytical techniques you need to know about in this evolving arena.

Leseprobe

Contents

Preface

About the Authors

Part One: Introduction to Mortgage and MBS Markets

Chapter 1: Overview of Mortgages and the Consumer Mortgage Market

Overview of Mortgages

Mortgage Loan Mechanics

Risks Associated with Mortgages and Mortgage Products

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 2: 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

Concepts Presented in this Chapter (in Order of Presentation)

Part Two: Prepayment and Default Metrics and Behavior

Chapter 3: Measurement of Prepayments and Defaults

Prepayment Terminology

Calculating Prepayment Speeds

Delinquency, Default, and Loss Terminology

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 4: Prepayments and Factors Influencing the Return of Principal

Prepayment Fundamentals

Factors Influencing Prepayment Speeds

Defaults and “Involuntary” Prepayments

Concepts Presented in this Chapter (in Order of Presentation)

Part Three: Structuring

Chapter 5: Introduction to MBS Structuring Techniques

Underlying Logic in Structuring Cash Flows

Structuring Different Mortgage Products

Fundamentals of Structuring CMOs

Chapter 6: Fundamental MBS Structuring Techniques

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

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 7: Fundamental MBS Structuring Techniques

Coupon Stripping and Boosting

Floater–Inverse Floater Combinations

Two-Tiered Index Bonds (TTIBS)

Excess Servicing IOs

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 8: Structuring Private-Label CMOs

Private-Label Credit Enhancement

Private-Label Senior Structuring Variations

Governing Documents

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 9: 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

Concepts Presented in this Chapter (in Order of Presentation)

Part Four: Valuation and Analysis

Chapter 10: Techniques for Valuing MBS

Static Cash Flow Yield Analysis

Z-Spread

Valuation Using Monte Carlo Simulation and OAS Analysis

Total Return Analysis

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 11: Measuring MBS Interest Rate Risk

Duration

Convexity

Yield Curve Risk

Other Risk Measures

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 12: Evaluating Senior MBS and CMOs

Yield and Spread Matrices

Monte Carlo and OAS Analysis

Total Return Analysis

Evaluating Inverse Floaters

Concepts Presented in this Chapter (in Order of Presentation)

Chapter 13: Analysis of Nonagency MBS

Factors Impacting Returns from Nonagency MBS

Understanding the Evolution of Credit Performance within a Transaction

The Process of Estimating Private-Label MBS Returns

Concepts Presented in this Chapter (in Order of Presentation)

Appendix

Index

The Frank J. Fabozzi Series

Fixed Income Securities, Second Edition by Frank J. Fabozzi

Focus on Value: A Corporate and Investor Guide to Wealth Creation by James L. Grant and James A. Abate

Handbook of Global Fixed Income Calculations by Dragomir Krgin

Managing a Corporate Bond Portfolio by Leland E. Crabbe and Frank J. Fabozzi

Real Options and Option-Embedded Securities by William T. Moore

Capital Budgeting: Theory and Practice by Pamela P. Peterson and Frank J. Fabozzi

The Exchange-Traded Funds Manual by Gary L. Gastineau

Professional Perspectives on Fixed Income Portfolio Management, Volume 3 edited by Frank J. Fabozzi

Investing in Emerging Fixed Income Markets edited by Frank J. Fabozzi and Efstathia Pilarinu

Handbook of Alternative Assets by Mark J. P. Anson

The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry

The Handbook of Financial Instruments edited by Frank J. Fabozzi

Collateralized Debt Obligations: Structures and Analysis by Laurie S. Goodman and Frank J. Fabozzi

Interest Rate, Term Structure, and Valuation Modeling edited by Frank J. Fabozzi

Investment Performance Measurement by Bruce J. Feibel

The Handbook of Equity Style Management edited by T. Daniel Coggin and Frank J. Fabozzi

Foundations of Economic Value Added, Second Edition by James L. Grant

Financial Management and Analysis, Second Edition by Frank J. Fabozzi and Pamela P. Peterson

Measuring and Controlling Interest Rate and Credit Risk, Second Edition by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry

Professional Perspectives on Fixed Income Portfolio Management, Volume 4 edited by Frank J. Fabozzi

The Handbook of European Fixed Income Securities edited by Frank J. Fabozzi and Moorad Choudhry

The Handbook of European Structured Financial Products edited by Frank J. Fabozzi and Moorad Choudhry

The Mathematics of Financial Modeling and Investment Management by Sergio M. Focardi and Frank J. Fabozzi

Short Selling: Strategies, Risks, and Rewards edited by Frank J. Fabozzi

The Real Estate Investment Handbook by G. Timothy Haight and Daniel Singer

Market Neutral Strategies edited by Bruce I. Jacobs and Kenneth N. Levy

Securities Finance: Securities Lending and Repurchase Agreements edited by Frank J. Fabozzi and Steven V. Mann

Fat-Tailed and Skewed Asset Return Distributions by Svetlozar T. Rachev, Christian Menn, and Frank J. Fabozzi

Financial Modeling of the Equity Market: From CAPM to Cointegration by Frank J. Fabozzi, Sergio M. Focardi, and Petter N. Kolm

Advanced Bond Portfolio Management: Best Practices in Modeling and Strategies edited by Frank J. Fabozzi, Lionel Martellini, and Philippe Priaulet

Analysis of Financial Statements, Second Edition by Pamela P. Peterson and Frank J. Fabozzi

Collateralized Debt Obligations: Structures and Analysis, Second Edition by Douglas J. Lucas, Laurie S. Goodman, and Frank J. Fabozzi

Handbook of Alternative Assets, Second Edition by Mark J. P. Anson

Introduction to Structured Finance by Frank J. Fabozzi, Henry A. Davis, and Moorad Choudhry

Financial Econometrics by Svetlozar T. Rachev, Stefan Mittnik, Frank J. Fabozzi, Sergio M. Focardi, and Teo Jasic

Developments in Collateralized Debt Obligations: New Products and Insights by Douglas J. Lucas, Laurie S. Goodman, Frank J. Fabozzi, and Rebecca J. Manning

Robust Portfolio Optimization and Management by Frank J. Fabozzi, Petter N. Kolm, Dessislava A. Pachamanova, and Sergio M. Focardi

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimizations by Svetlozar T. Rachev, Stogan V. Stoyanov, and Frank J. Fabozzi

How to Select Investment Managers and Evaluate Performance by G. Timothy Haight, Stephen O. Morrell, and Glenn E. Ross

Bayesian Methods in Finance by Svetlozar T. Rachev, John S. J. Hsu, Biliana S. Bagasheva, and Frank J. Fabozzi

Structured Products and Related Credit Derivatives by Brian P. Lancaster, Glenn M. Schultz, and Frank J. Fabozzi

Quantitative Equity Investing: Techniques and Strategies by Frank J. Fabozzi, Sergio M. Focardi, and Petter N. Kolm

Introduction to Fixed Income Analytics, Second Edition by Frank J. Fabozzi and Steven V. Mann

The Handbook of Traditional and Alternative Investment Vehicles by Mark J. P. Anson, Frank J. Fabozzi, and Frank J. Jones

The Theory and Practice of Investment Management, Second Edition edited by Frank J. Fabozzi and Harry M. Markowitz

Copyright © 2011 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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978-1-118-00469-2 (cloth); 978-1-118-14929-4 (ebk); 978-1-118-14927-0 (ebk); 978-1-118-14928-7 (ebk)

FJF

To my wife Donna and my children Francesco, Patricia, and Karly

AKB

To my wife Marcia and my children Christina and Alex

WSB

To Heidi, Morgan, and Zachary

Preface

Mortgage-backed securities (MBS) continue to comprise one of the largest securities markets in the world. As of the end of 2010, the face value of all U.S.-issued MBS was greater than $6 trillion, only exceeded by the $8.8 trillion in marketable Treasury securities outstanding. The MBS market’s size in turn reflects the enormity of the U.S. residential real estate market. As an example, data from the National Association of Realtors indicate that existing home sales for 2010 were estimated to total 4.9 million units; at an average price of $220,000, the dollar value of all transactions was in the area of $1 trillion dollars for the year.

Both the consumer mortgage and MBS sectors have, however, undergone significant changes since the publication of the first edition. Many of these changes resulted, directly and indirectly, from the collapse in mortgage performance which first became evident in late 2006 and led to the financial crisis of 2007–2008. A primary reason for creating a new edition of this book was to reassess the MBS sector in the context of the changes resulting from that crisis, as well as explore the insights gained in the post-crisis period. Many of these changes can be understood by reviewing some of the trends identified in the earlier edition.

The growth of lending to borrowers with nontraditional financial profiles. While this helped many underserved borrowers gain access to mortgage credit, an unintended result was that numerous borrowers who received mortgages were unable or unwilling to service their debts. Both the creation of products targeted to lower-quality borrowers, as well as the widespread relaxation of underwriting standards, led to huge losses for holders and guarantors of loans and/or securities that ultimately threatened the solvency of the world’s financial system.A proliferation in the types of loan products offered to consumers. The period between 2002 and mid-2007 was characterized by a fast-growing menu of loan programs, most notably “affordability” products that allowed borrowers increased flexibility in choosing interest and principal payment schemes. However, the growth in consumer choices was not accompanied by a sophisticated understanding of the technicalities associated with many products, as well as the risks being accepted by borrowers. This resulted in a multitude of cases where borrowers overextended themselves by spending more on homes than they could realistically afford, leaving them vulnerable to the economic downturn that began in 2008. It also led to the marketing of increasingly complex products that subsequently experienced enormous levels of credit problems and defaults.Rising residential home prices. While the “housing bubble” resulted from a variety of factors, a key element was the excess of funds that flowed into housing finance, as many borrowers utilized increasingly available loans to fund home purchases. The availability of “affordability” products, which allowed home buyers to purchase homes consuming an unsustainable share of their incomes, also contributed to sharply rising home prices. The subsequent nationwide collapse in home prices, which reduced the prices of homes in vulnerable areas by 40% to 50%, had an enormous impact on consumer behavior and MBS performance. Unprecedented phenomena such as “strategic defaults,” in which homeowners default on loans that they can ostensibly still afford to pay, run counter to all earlier experience and logic, and have forced investors to rethink many of the assumptions underlying MBS credit performance.

As a result of these phenomena, the mortgage and MBS markets remain in a highly unsettled state at the writing of this edition. Many factors that will determine the future structure of these markets remain uncertain, including the status of Freddie Mac and Fannie Mae and much of the regulatory framework for MBS issuance and servicing. These uncertainties, combined with the demonstrated importance of the sector to the economy and the financial system, makes a broad and sophisticated understanding of MBS markets and products essential to financial market participants. This book attempts to fulfill that need.

There are other pragmatic considerations involved in creating this updated edition. Many people that either work in or observe the financial markets, such as investment managers, reporters, and government officials, must interact with MBS products and markets. In our view, a better and more sophisticated understanding of the mortgage and MBS sectors will work to the benefit of the entire financial system. The mortgage and MBS markets also continue to employ large numbers of people in a variety of functions and roles. In particular, the MBS markets’ unique place at the junction between consumer and capital markets finance makes it one of the most dynamic and challenging areas of finance. While deep expertise is ultimately gained through experience, we enjoy the opportunity to help budding professionals understand the nuances of the product and marketplace.

This book differs from the earlier edition in a number of important ways. The discussion of prepayment behavior and analysis was completely reworked to describe the current thinking on prepayment speeds and behavior, while taking account of credit- and housing-related factors. We also discuss in detail the breakdown of prepayments based on their causation, that is, voluntary prepayments (which include home sales, cash-out activity, and rate-driven refinancings) versus involuntary prepayments (which result from borrower credit problems). In addition, we devote an entirely new chapter to the evaluation of nonagency MBS. This is particularly important given the hard-earned understanding that bonds lacking government guarantees cannot automatically be assumed to be “money-good” irrespective of their credit rating; as we note repeatedly, the evaluation of all nonagency securities requires at least some credit analysis.

In more general terms, the text incorporates experience and data accumulated from the post-2006 events. In addition to numerous contextual changes outlining pre- and post-crisis developments, we attempt to use the insights gained over the past few years to impart a more complete understanding of consumer behaviors and choices and how they impact the MBS markets. In particular, the role of real estate appreciation and depreciation is reassessed in light of the downturn in home prices after 2006 and the unprecedented problems and actions that it spawned.

As with the first edition, the text is divided into four parts. Part One (Chapters 1 and 2) provides introductions to the mortgage and MBS markets. Part Two (Chapters 3 and 4) discusses prepayment and default behavior, along with the array of metrics and conventions used to quantify these activities. Part Three, consisting of Chapters 5 through 9, describes a variety of structures and tranches, along with techniques used in structuring them. Finally, Part Four, Chapters 10 through 13, outlines the metrics and methodologies necessary to evaluate the potential risks and returns associated with mortgage-backed securities.

The appendix discusses a relatively new approach to MBS analytics. Coauthored by Andrew Kalotay, Deane Yang, and Frank Fabozzi, this “option-theoretic” approach is radically different from other MBS models in that it uses the same “recursive lattice” approach commonly used for valuing options in the equity and corporate bond markets. It represents an important advance in modeling and valuing MBS, and the Coupled Lattice Efficiency Analysis (CLEAN) model utilizing the approach was awarded a patent in April 2009.

Finally, we remain grateful to William Shang, Kevin Doyle, Joe Janssen, and Brian Stack for their help in understanding the structures and structuring techniques discussed in Part Three of the book. We also acknowledge the contributions of Paul Jacob to Chapter 13 with respect to the discussion and analysis of transition behavior. Finally, thanks to The Yield Book, Vichara Technologies, Intex Solutions, and CoreLogic for allowing the use of their analytics and data in this book.

Frank J. Fabozzi

Anand K. Bhattacharya

William S. Berliner

About the Authors

Frank J. Fabozzi is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. Prior to joining EDHEC in August 2011, he held various professorial positions in finance at Yale University’s School of Management from 1994 to 2011 and from 1986 to 1992 was a visiting professor of finance and accounting at MIT’s Sloan School of Management. Professor Fabozzi is the editor of the Journal of Portfolio Management, as well as an associate editor of the Journal of Fixed Income, and on the editorial boards of the Journal of Asset Management, Journal of Structured Finance, Quantitative Finance, andReview of Futures Markets. He earned a doctorate in economics from the City University of New York in 1972. In 2002 he 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 Professor of Practice in the Department of Finance, W. P. Carey School of Business, Arizona State University (ASU) and a Fixed Income Strategist with Stifel Nicolaus and Company Inc. He has consulted with various financial institutions on issues of balance sheet restructuring and asset valuation. Prior to joining ASU in 2009, he was a Managing Director responsible for the management of fixed income research and strategy; development of trading, valuation and risk management systems; and management of technological infrastructure at Countrywide Capital Markets Inc. His prior supervisory positions include Managing Director responsible for capital markets and risk management at Imperial Credit Industries Inc. and Managing Director, Global Head of Fixed Income Research and Strategy and a member of the Taxable Fixed Income Operating Committee at Prudential Securities Inc. Earlier on in his career, Dr. Bhattacharya held positions in research and product management at Merrill Lynch Capital Markets, Franklin Savings Association, and Security Pacific Merchant Bank. He has written extensively in various facets of fixed income valuation and debt portfolio management and authored or coauthored over 65 publications in various academic, professional journals and industry handbooks. He has also coauthored or coedited three books on mortgage-backed and asset-backed securities. Dr. Bhattacharya earned his Ph.D. in Finance from Arizona State University in 1984.

William S. Berliner is the Principal of Berliner Consulting & Research, a boutique firm specializing in mortgages and mortgage-backed securities. His primary focus is security and loan valuation and hedging, serving both institutional investors and mortgage originators. He also writes a monthly column for Asset Securitization Report. Prior to founding Berliner Consulting, he was Executive Vice President in charge of the Strategies group at Countrywide Securities Corporation. In this capacity, he was directly responsible for the generation of trade strategies and relative value analysis, and wrote and edited many of the firm’s research reports and publications. He began his career in 1985 at Bear, Stearns and Co., and moved to Nikko Securities in 1993, where he eventually ran CMO trading. He joined Countrywide Securities as a CMO trader in 1996, and moved to the Fixed Income Research department in early 1998. Mr. Berliner has a degree in Interpersonal Communications from Rutgers College and an MBA in Finance from the Rutgers Graduate School of Business.

Part One

Introduction to Mortgage and MBS Markets

CHAPTER 1

Overview of Mortgages and the Consumer Mortgage Market

Over the past few decades, the residential mortgage market in the United States has emerged as one of the world’s largest asset classes. At its peak in the first quarter of 2008, the total face value of household mortgage debt exceeded $10.6 trillion dollars. The growth of the residential mortgage market reflected the rapid growth in the aggregate value of real estate between 2001 and 2006, along with consumers’ propensity to monetize their home equity through additional borrowing.

The composition and performance of the mortgage market has undergone profound shifts on several occasions, and can be divided into separate phases. The period between 2001 and early 2007 was characterized by numerous innovations in product features, pricing paradigms, and underwriting practices, which were underpinned by steady nationwide increases in home prices. The sudden and protracted decline in the credit performance of residential mortgage loans, which first became apparent in 2006, led to the recognition that many of the products and practices developed during the earlier period were fundamentally flawed, with their weaknesses masked by the strength in the residential real estate markets. This led to a retrenchment by mortgage lenders characterized by conservative lending practices and greater regulatory scrutiny. At this writing, most lending programs require high credit scores and (with the exception of some government-backed programs) relatively large down payments. Almost all programs currently require full documentation of income sources, while so-called “affordability products” (which allow obligors to borrow increasingly large amounts relative to their income) have fallen out of favor and, in some cases, been outlawed entirely.

Despite the changes and dislocations experienced by the mortgage industry, however, it remains critical to the health of the housing market. Since most home buyers need to finance at least some of the purchase price, the availability and cost of mortgage money is a key factor driving sales volumes for new and existing homes. Moreover, the events of the past few years have demonstrated that familiarity with the primary mortgage market is important in understanding a variety of trends and factors influencing the market for securitized mortgage products.