Mortgage-Backed Securities E-Book

Frank J. Fabozzi

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

Seitenzahl: 460

Veröffentlichungsjahr: 2011

Beschreibung

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.

Leseprobe

Table of Contents

THE FRANK J. FABOZZI SERIES

Title Page

Copyright Page

Dedication

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

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

PART Two - Prepayment and Default Metrics and Behavior

CHAPTER 3 - Measurement of Prepayments and Defaults

PREPAYMENT CONVENTION TERMINOLOGY

DELINQUENCY, DEFAULT, AND LOSS TERMINOLOGY

CHAPTER 4 - Prepayment Behavior and Performance

PREPAYMENT BEHAVIOR

DRIVERS OF PREPAYMENT ACTIVITY

ADDITIONAL FACTORS AFFECTING PREPAYMENT SPEEDS

PREPAYMENT BEHAVIOR OF “NONFIXED-PAYMENT” PRODUCTS

SUMMARY

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: 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

CHAPTER 7 - Fundamental MBS Structuring Techniques: Divisions of Interest

COUPON STRIPPING AND BOOSTING

FLOATER/INVERSE FLOATER COMBINATIONS

TWO-TIERED INDEX BONDS (TTIBS)

EXCESS SERVICING IOs

CHAPTER 8 - Structuring Private Label CMOs

PRIVATE LABEL CREDIT ENHANCEMENT

PRIVATE LABEL SENIOR STRUCTURING VARIATIONS

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

PART Four - Valuation and Analysis

CHAPTER 10 - Techniques for Valuing MBS

STATIC CASH FLOW YIELD ANALYSIS

ZERO-VOLATILITY SPREAD

VALUATION USING MONTE CARLO SIMULATION AND OAS ANALYSIS

TOTAL RETURN ANALYSIS

CHAPTER 11 - Measuring MBS Interest Rate Risk

DURATION

CONVEXITY

YIELD CURVE RISK

OTHER RISK MEASURES

ILLUSTRATION OF RISK MEASURES

SUMMARY

CHAPTER 12 - 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

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 Exchange-Traded Funds Manual by Gary L. Gastineau

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

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

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

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved.

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ISBN: 978-0-470-04773-6

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

Over the past quarter of a century, the residential mortgage market has grown into the largest market for consumer debt. The market for mortgage-backed securities or MBS, in which mortgage cash flows are packaged and distributed to investors, has grown concomitantly. According to the Securities Industry and Financial Markets Associations (formerly the Bond Market Association), the market for mortgage-related securities surpassed the U.S. Treasury market at the end of 1999 to become the largest cash financial market in the world. By the end of 2006, the total amount of MBS outstanding was $6.4 trillion, 49% larger than the market for Treasury debt.

In addition to their size, both the consumer mortgage and MBS markets have become increasingly flexible and dynamic. The MBS market has traditionally exhibited great creativity in constructing different products and structures to help a wide variety of investors meet their investment objectives, exemplifying the concept of financial market segmentation. Innovations first conceived in the 1980s, such as senior-subordinate structures and planned amortization class (PAC) bonds, have recently been joined by concepts such as super-stable or “sinker” bonds and corridor-cap floaters. In addition, complex analytical tools have been developed and refined in order to aid investors in valuing their holdings and assess relative value among competing investment alternatives.

The consumer mortgage market has also undergone a period of substantial innovation and change. A major change occurred in the late 1990s with the advent of “risk-based pricing,” which allowed lenders to price the risks associated with each loan, instead of the earlier equivalent of “one-size-fits-all” loan pricing. This change, accompanied by increased marketing savvy on the part of lenders, has led to major changes in the primary mortgage market. These changes include:

• A proliferation in the types of different loan products. This includes products that are pegged to different parts of the yield curve, such as adjustable rate mortgages (ARMs), as well as loans with more flexible amortization schemes.

• The growth of lending to borrowers with nontraditional financial profiles . This has led to the growth of market segments such as alt-A and subprime lending, as well as investment products designed to securitize these riskier products.

• The increased importance of mortgage borrowings to the overall financial conditions of consumers. This is reflected in the increased sensitivity of borrowers to monthly payments, rather than rates, as well as the willingness of homeowners to finance their lifestyle by monetizing home equity through cash-out refinancings.

These changes in both the consumer and financial markets, as well as accompanying sharp increases in real estate prices throughout most of the United States, have created the need for a reassessment of the MBS universe. This book attempts to fill that need.

This book is divided into four parts. Chapters 1 and 2 (Part One) provide an introduction to the mortgage and MBS markets. Part Two (Chapters 3 and 4) is a primer on prepayment and default metrics and behavior. Part Three of the book, Chapters 5 to 9, focuses on structuring. The emphasis in this part of the book is on the details of structuring, with an emphasis on defining both differences and commonalities across various mortgage products and techniques. In Part Four of the book (Chapters 10 to 12), the methodologies and techniques used to value MBS products and assess interest rate risk are described and illustrated.

The Appendix, coauthored by Andrew Kalotay and Deane Yang of Andrew Kalotay Associates and Frank Fabozzi, describes a new option theoretic approach to MBS valuation. The commercial software for this methodology is referred to as the CLEAN (Coupled Lattice Efficiency Analysis) model. Unlike standard industry models that use the Monte Carlo approach described in Chapter 10, the model presented in the Appendix uses the same “recursive lattice” approach commonly used for valuing American equity and bond options. Introduced in December 2004, the model presented has been well received by market participants, due to its speed and precision. It has been reported that it can value 10,000 MBS per minute, versus 100 securities using the Monte Carlo approach. As an indication of its growing acceptance by the market, the CLEAN model has been licensed by a risk management firm to value their clients’ MBS portfolios, deployed by Beacon Capital Strategies (a fixed income trading platform) to provide indicative pricing of MBS, and used by Sector (a supplier of agency MBS data to market participants) to launch a new pricing service for MBS. Moreover, it is unique in that it models directly individual borrowers’ refinancing decisions, in contrast to standard industry models, which use econometric models to extrapolate past aggregate behavior into the future. As such, it represents an important advance in modeling prepayments and valuing MBS, and the interest this novel approach is generating among market participants led us to include it in this text.

The authors would like to acknowledge the contributions of a number of individuals at Countrywide Securities Corporation to this project. William Shang, Joseph Janssen, and Kevin Doyle were extremely helpful in the writing of Chapter 9; their expertise was instrumental in discussing a series of dense and complex topics. Brian Stack contributed to the sections on private label structuring in Chapter 8, while Weiss Piloti edited virtually the entire book through multiple rewrites and revisions. Finally, thanks to Ron Kripalani, the President of CSC, for his support of this project.

Frank J. Fabozzi Anand K. Bhattacharya William S. Berliner

About the Authors

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.

PART One

Introduction to Mortgage and MBS Markets

CHAPTER 1

Overview of Mortgages and the Consumer Mortgage Market

The mortgage market in the United States has emerged as one of the world’s largest asset classes. According to Federal Reserve statistics, the total face value of 1-4 family residential mortgage debt outstanding was approximately $9.5 trillion as of the third quarter of 2006. The growth of the mortgage market is attributable to a variety of factors. Most notably, strong sales and price growth in the domestic real estate markets and the increased acceptance of new loan products on the part of the consumer has dovetailed with increased comfort levels with respect to the credit quality of the sector and the acceptance of a variety of loan products as collateral for securitizations.

Due to a variety of reasons such as product innovation, technological advancement, and demographic and cultural changes, the composition of the primary mortgage market is evolving at a rapid rate—older concepts are being updated, while a host of new products is also being developed and marketed. Consequently, the mortgage-lending paradigm continues to be refined in ways that have allowed lenders to offer a large variety of products designed to appeal to consumer needs and tastes. This evolution has been facilitated by sophistication in pricing that has allowed for the quantification of the inherent risks in such loans. At the same time, structures and techniques that allow the burgeoning variety of products to be securitized have been created and marketed, helping to meet the investment needs of a variety of market segments and investor clienteles.

The purpose of this chapter is to explain mortgage products and lending practices. The chapter introduces the basic tenets of the primary mortgage market and mortgage lending, and summarizes the various product offerings in the sector. In conjunction with the following chapter on mortgage-backed securities (MBS) and the MBS market, this chapter also provides a framework for understanding the concepts and practices addressed in the remainder of this book.

OVERVIEW OF MORTGAGES

In general, a mortgage is a loan that is secured by underlying assets that can be repossessed in the event of default. For the purposes of this book, a mortgage is defined as a loan made to the owner of a 1-4 family residential dwelling and secured by the underlying property (both the land and the structure or “improvement”). After issuance, loans must be managed (or serviced) by units that, for a fee, collect payments from borrowers and pass them on to investors. are also responsible for interfacing with borrowers if they become delinquent on their payments, and also manage the disposition of the loan and the underlying property if the loan goes into foreclosure.