Subprime Mortgage Credit Derivatives
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.
About The Authors.
Part One. Mortgage Credit.
Chapter 1. Overview of The Nonagency Mortgage Market.
Roots Of The 2007–2008 Subprime Crisis.
Defining Characteristics Of Nonagency Mortgages.
Agency versus Nonagency Execution.
Chapter 2. 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.
Chapter 3. Second Lien Mortgage Credit.
Two Types of Seconds.
Higher Risks in Seconds.
Why Higher Losses?
Part Two. Mortgage Securitizations.
Chapter 4. Features of Excess Spread/Overcollateralization: The Principle Subprime Structure.
Excess Spread-Based Credit Enhancement.
OC In Alt-A-Land.
OC Internal Workings.
Chapter 5. 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.
Part Three. Credit Default Swaps On Mortgage Securities.
Chapter 6. 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.
Chapter 7. The ABX and TABX Indices.
How a Deal Gets into the Index.
Index Pricing Over Time.
ABX Tranche Trading.
TABX versus CDOs.
Chapter 8. Relationship among Cash, ABCDS, and the ABX.
Fundamental Contractual Differences-Single Name ABCDS/ABX Index/Cash.
What Keeps The Arbitrage From Going Away?
Appendix: Importance of ABCDS to CDO Managers.
Chapter 9. Credit Default Swaps on CDOs
CDO CDS Nomenclature.
CDO Credit Problems and their Consequences.
Alternative Interest Cap Options.
Cash CDO versus CDO CDS.
Exiting a CDO CDS.
Rating Agency Concerns on CDOs that Sell Protection via CDO CDS.
Part Four. Loss Projection and Security Valuation.
Chapter 10. Loss Projection for Subprime, Alt-A, and Second Lien Mortgages.
Two Ways Of Projecting Loss.
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.
Chapter 11. Valuing the ABX.
Review of Basic Valuation for ABX Indices.
Review of Valuation Approaches.
The “Simple” or Do-It-Yourself Approach To ABX Valuation.
ABX After Subprime Shutdown.
Appendix: Results of Original “Base” Pricing (And Number of Bonds Written Down) and the New “Shutdown” Estimates.
Chapter 12. 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 ABS CDOs.
Aggregating Mortgage Bond Losses In 2005 Mezzanine ABS CDOs.
Drivers of CDO Losses And The Role Of The Manager.
ABS CDO Valuation And CDO Structure.
Section Five. Subprime Meltdown.
Chapter 13. The Great Subprime Meltdown Of 2007.
An Earlier Subprime Crisis.
The Virtuous Cycle.
Early-Pay Defaults: The First Hint Things Were Changing.
The 2006 Conundrum.
Banking Regulators: Not Too Little But Too Late.
Who Will Rescue the Subprime Borrower?
Is Securitization The Villain?
Lack of Transparency.
Future for Subprime.
SHUMIN LI is Executive Director in the U.S. Securitized Products Strategy Group at UBS.
DOUGLAS J. LUCAS is Executive Director and head of CDO research at UBS.
THOMAS A. ZIMMERMAN is Managing Director in the U.S. Securitized Products Strategy Group at UBS.
FRANK J. FABOZZI, PhD, CFA, is Professor in the Practice of Finance at Yale University's School of Management and the Editor of the Journal of Portfolio Management.