An up-to-date look at the latest innovations in mortgage-backed securitiesSince the last edition ofMortgage-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 performanceAddresses revised valuation techniques in which all non-agency MBS must be treated as credit piecesExamines 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.
FRANK J. FABOZZI, PHD, CFA, is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. Prior to joining EDHEC, 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. He is also Editor of theJournal of Portfolio Management.
ANAND K. BHATTACHARYA, PHD, is a Professor of Practice in the Department of Finance, W. P. Carey School of Business, Arizona State University, and a Fixed Income Strategist with Stifel, Nicolaus& Company, Inc. He has consulted with various financial institutions on issues of balance sheet restructuring and asset valuation.
WILLIAM S. BERLINER is the Principal of Berliner Consulting& Research, LLC, 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. Berliner also writes a monthly column forAsset Securitization Report.
Preface xi
About the Authors xv
PART ONE Introduction to Mortgage and MBS Markets 1
CHAPTER 1 Overview of Mortgages and the Consumer Mortgage Market 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 Market 23
Creating Different Types of MBS 24
MBS Trading 35
The Role of the MBS Markets in Generating Consumer Lending Rates 40
Cash Flow Structuring 44
Concepts Presented in this Chapter 46
PART TWO Prepayment and Default Metrics and Behavior 47
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 of Principal 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 Techniques 101
Underlying Logic in Structuring Cash Flows 102
Structuring Different Mortgage Products 103
Fundamentals of Structuring CMOs 106
CHAPTER 6 Fundamental MBS Structuring Techniques: Divisions of Principal 109
Time Tranching 110
Planned Amortization Classes (PACs) and the PACSupport Structure 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: Divisions of Interest 141
Coupon Stripping and Boosting 143
FloaterInverse 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 a Transaction 284
The Process of Estimating Private-Label MBS Returns 290
Concepts Presented in this Chapter 304
APPENDIX An Option-Theoretic Approach to Valuing MBS 305
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
