Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques / Edition 2

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Even with the recent events that have occurred in this field,mortgage-backed securities (MBS) continue to comprise one of thelargest securities markets in the world. However, since thepublication of the first edition of Mortgage-Backed Securities,both the consumer mortgage and MBS sectors have undergonesignificant changes—many of them resulting directly, andindirectly, from the collapse in mortgage performance thatinitially appeared in late 2006 and led to the financial crisis of2007–2008.

That's why the expert author team of Frank Fabozzi, AnandBhattacharya, and William Berliner—who have witnessed manycycles of change in the mortgage and MBS sectors—have returnedto create the Second Edition of Mortgage-Backed Securities. In it,they skillfully reassess the MBS sector in the context of thechanges resulting from the crisis, as well as explore the insightsgained in the post-crisis period.

Engaging and informative, this updated edition continues toaddress the investment characteristics, creation, and analysis ofmortgage-backed securities, but now does so with the lessons anddata accumulated from post-2006 events in mind. Along the way, itoffers valuable insights that reflect the current marketenvironment: reexamining prepayment behavior and analysis todescribe the latest thinking on prepayment speeds and behavior,while taking into account credit and housing-related factors; anddevoting an entirely new chapter to the evaluation of non-agencyMBS.

Divided into four comprehensive parts, this reliable resourcecontains cutting-edge concepts you'll need to understand in orderto succeed within this arena.

Part One: introduces the essential aspects of the mortgage andMBS markets

Part Two: discusses prepayment and default behavior, along withan array of metrics and conventions used to quantify theseactivities

Part Three: describes a variety of structures and tranches,along with techniques used in structuring them

Part Four: outlines the metrics and methodologies necessary toevaluate the potential risks and returns associated withmortgage-backed securities

The mortgage and MBS markets remain in a highly unsettled state,which makes a broad and sophisticated understanding of MBS marketsand products essential. The Second Edition of Mortgage-BackedSecurities offers you a realistic assessment of this field and willput you in a better position to excel in one of the most dynamicand challenging areas of finance.

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Product Details

  • ISBN-13: 9781118004692
  • Publisher: Wiley
  • Publication date: 9/21/2011
  • Series: Frank J. Fabozzi Series, #200
  • Edition number: 2
  • Pages: 352
  • Sales rank: 975,689
  • Product dimensions: 6.00 (w) x 9.10 (h) x 1.40 (d)

Meet the Author

Frank J. Fabozzi, PhD, CFA, is Professor of Finance at EDHECBusiness School and a member of the EDHEC-Risk Institute. Prior tojoining EDHEC, he held various professorial positions in finance atYale University's School of Management from 1994 to 2011 and, from1986 to 1992, was a visiting professor of finance and accounting atMIT's Sloan School of Management. He is also Editor of the Journalof Portfolio Management.

Anand K. Bhattacharya, PhD, is a Professor of Practice inthe Department of Finance, W. P. Carey School of Business, ArizonaState University, and a Fixed Income Strategist with Stifel,Nicolaus & Company, Inc. He has consulted with variousfinancial institutions on issues of balance sheet restructuring andasset valuation.

William S. Berliner is the Principal of BerlinerConsulting & Research, LLC, a boutique firm specializing inmortgages and mortgage-backed securities. His primary focus issecurity and loan valuation and hedging, serving both institutionalinvestors and mortgage originators. Berliner also writes a monthlycolumn for Asset Securitization Report.

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Table of Contents

Preface xi

About the Authors xv

PART ONE: Introduction to Mortgage and MBS Markets 1

CHAPTER 1: Overview of Mortgages and the Consumer MortgageMarket 3

Overview of Mortgages 4

Mortgage Loan Mechanics 12

Risks Associated with Mortgages and Mortgage Products 17

Concepts Presented in this Chapter 22

CHAPTER 2: Overview of the Mortgage-Backed Securities Market23

Creating Different Types of MBS 24

MBS Trading 35

The Role of the MBS Markets in Generating Consumer Lending Rates40

Cash Flow Structuring 44

Concepts Presented in this Chapter 46

PART TWO: Prepayment and Default Metrics and Behavior47

CHAPTER 3: Measurement of Prepayments and Defaults 49

Prepayment Terminology 50

Calculating Prepayment Speeds 52

Delinquency, Default, and Loss Terminology 66

Concepts Presented in this Chapter 76

CHAPTER 4: Prepayments and Factors Influencing the Return ofPrincipal 77

Prepayment Fundamentals 77

Factors Influencing Prepayment Speeds 85

Defaults and "Involuntary" Prepayments 92

Concepts Presented in this Chapter 97

PART THREE: Structuring 99

CHAPTER 5: Introduction to MBS Structuring Techniques101

Underlying Logic in Structuring Cash Flows 102

Structuring Different Mortgage Products 103

Fundamentals of Structuring CMOs 106

CHAPTER 6: Fundamental MBS Structuring Techniques: Divisionsof Principal 109

Time Tranching 110

Planned Amortization Classes (PACs) and the PAC–SupportStructure 116

Targeted Amortization Class Bonds 130

Z-Bonds and Accretion-Directed Tranches 130

A Simple Structuring Example 134

Concepts Presented in this Chapter 140

CHAPTER 7: Fundamental MBS Structuring Techniques: Divisionsof Interest 141

Coupon Stripping and Boosting 143

Floater–Inverse Floater Combinations 147

Two-Tiered Index Bonds (TTIBs) 156

Excess Servicing IOs 160

Concepts Presented in this Chapter 166

CHAPTER 8: Structuring Private-Label CMOs 167

Private-Label Credit Enhancement 169

Private-Label Senior Structuring Variations 176

Governing Documents 189

Concepts Presented in this Chapter 191

CHAPTER 9: The Structuring of Mortgage ABS Deals 193

Fundamentals of ABS Structures 194

Credit Enhancement for Mortgage ABS Deals 199

Factors Influencing the Credit Structure of Deals 201

Additional Structuring Issues and Developments 203

Concepts Presented in this Chapter 208

PART FOUR: Valuation and Analysis 209

CHAPTER 10: Techniques for Valuing MBS 211

Static Cash Flow Yield Analysis 211

Z-Spread 213

Valuation Using Monte Carlo Simulation and OAS Analysis 214

Total Return Analysis 226

Concepts Presented in this Chapter 229

CHAPTER 11: Measuring MBS Interest Rate Risk 231

Duration 231

Convexity 238

Yield Curve Risk 241

Other Risk Measures 242

Concepts Presented in this Chapter 244

CHAPTER 12: Evaluating Senior MBS and CMOs 245

Yield and Spread Matrices 246

Monte Carlo and OAS Analysis 262

Total Return Analysis 268

Evaluating Inverse Floaters 274

Concepts Presented in this Chapter 279

CHAPTER 13: Analysis of Nonagency MBS 281

Factors Impacting Returns from Nonagency MBS 281

Understanding the Evolution of Credit Performance within aTransaction 284

The Process of Estimating Private-Label MBS Returns 290

Concepts Presented in this Chapter 304

APPENDIX: An Option-Theoretic Approach to Valuing MBS305

Option-Theoretic Models for Valuing MBS 306

An Option-Based Prepayment Model for Mortgages 307

Valuation of Mortgages 311

A Closer Look At Leapers and Laggards 319

Valuation of MBS 323

Index 327

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