Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques
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.
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.
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.
Drivers of Prepayment Activity.
Additional Factors Affecting Prepayment Speeds.
Prepayment Behavior of “Nonfixed-Payment” Products.
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.
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.
Valuation Using Monte Carlo Simulation and OAS Analysis.
Total Return Analysis.
Chapter 11: Measuring MBS Interest Rate Risk.
Yield Curve Risk.
Other Risk Measures.
Illustration of Risk Measures.
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.
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.
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.