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The Handbook of Mortgage-Backed Securities

by: Fabozzi, Frank

The Handbook of Mortgage-Backed Securities

by: Fabozzi, Frank

ISBN 13:
9780071460743
ISBN 10:
0071460748
Edition: 6th
Format: Hardcover
Copyright: 01/11/2006
Publisher: McGraw-Hill Education
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Summary

Mortgag acked securities continue to be one of the most exciting, fastest-growing sector of the fixed income market. According to the Mortgage Bankers Association, of the estimated $3 trillion in mortgage loans made in 2005, fully 80 percent ended up in mortgage-backed securities, representing a phenomenal 61 percent growth since 2001.

Preface

xxi

Contributors

xxv

SECTION ONE MORTGAGE-BACKED SECURITIES (MBS) PRODUCTS AND THE MORTGAGE MARKET

An Overview of Mortgages and the Mortgage Market

(32)

Anand K. Bhattacharya

Frank J. Fabozzi

William S. Berliner

Product Definition and Terms

(5)

Mortgage-Loan Mechanics

(6)

The Mortgage Industry

(2)

The Loan Underwriting Process

(3)

Generation of Mortgage Lending Rates

(7)

Risks Associated with Mortgages and MBS

(5)

The Evolving Roles of the GSEs

(3)

MBS Investors

(10)

Steven Abrahams

The Sources of Competitive Advantage in Investing in MBS

(4)

Fannie Mae and Freddie Mac

(2)

Insurers

(1)

Total-Return Portfolios

(2)

Change in the Competitive Landscape

(1)

The Portfolio Meets the Market

(1)

Mortgage Pass-Through Securities

(36)

Linda Lowell

Michael Corsi

Federally Sponsored Mortgage Pass-Through Programs

(6)

Pass-Through Cash Flows

(6)

Impact of Cash-Flow Variability on Yield and Average Life

(4)

Determinants of Prepayment Speeds

(6)

Gauging a Pool's Prepayment Risk

(6)

Anatomy of the Pass-Through Market

(7)

Trading, Settlement, and Clearing Procedures for Agency MBS

(12)

Jeffrey D. Biby

Srinivas Modukuri

Brian Hargrave

TBA Trading: Turning Pool-Specific Securities into Generic Securities

(1)

Settlement Procedures for Agency Pass-Throughs

(1)

BMA Good Delivery Guidelines

(2)

Variance

(1)

Trading and Settlement Procedures for Other MBS Products

(1)

Clearing Procedures for MBS

(1)

Summary

(1)

Appendix: What Happens When an Investor Buys a Mortgage-Backed Security?

(2)

What if the Dealer Fails to Deliver

(3)

Defining Nonagency MBS

(20)

Thomas Zimmerman

The Nonagency Market

(1)

Defining Characteristics

(4)

Credit

(3)

Distribution of Characteristics

101

(3)

Evolution of Loan and Borrower Characteristics

104

(2)

Credit and Prepayment Performance

106

(5)

Agency Expansion into Nonagency Zones

111

(1)

Summary

111

(2)

Credit Enhancements for Nonagency MBS Products

113

(14)

Frank J. Fabozzi

External Credit Enhancements

113

(3)

Internal Credit Enhancements

116

(6)

Use of Interest-Rate Derivative Instruments

122

(5)

Understanding the Prospectus and Prospectus Supplement

127

(30)

David M. Lukach

Yogesh Gupta

Thomas Knox

John Gibson

Securities Act Registration Statements: The Disclosure Framework

128

(1)

Disclosures for Form S-3 Registered MBS Offerings

129

(3)

Typical Sections of a Prospectus and Prospectus Supplement

132

(24)

Conclusion

156

(1)

Waterfall Cash-Flow Mechanics in European RMBS

157

(14)

Alexander Batchvarov

William Davies

Altynay Davletova

General Forms of Waterfalls

157

(2)

Variations in European RMBS Waterfalls by Country

159

(6)

Combined or Split RMBS Waterfalls: Compare and Contrast

165

(3)

Summary

168

(3)

SECTION TWO ALTERNATIVE MORTGAGE PRODUCTS

Exploring the MBS/ABS Continuum: The Growth and Tiering of the Alt-A Hybrid Sector

171

(16)

Satish Mansukhani

Exploring the MBS/ABS Continuum: Defining the Risk Space

172

(1)

The MBS/ABS Continuum in the Hybrid Sector

173

(2)

Prepayment and Credit Performance Follow Relative Placement along the Continuum

175

(4)

Deal Structures also Mirror Relative Placement along the Continuum

179

(1)

Sufficient Credit Enhancement to Withstand Multiples of Default Frequency Experienced on Weaker Subprime Mortgages

180

(3)

The Value of Available Funds CAPS

183

(4)

Alt-A Mortgages and MBS

187

(20)

Anand K. Bhattacharya

William S. Berliner

Jonathan Lieber

Background

187

(3)

Loan-Level Characteristics

190

(2)

Factors Underlying Prepayment Behavior

192

(8)

Empirical Prepayment Performance

200

(4)

Recent Developments

204

(3)

Fixed-Rate Alt-A MBS

207

(52)

Satish Mansukhani

Arjune Budhram

Mu'taz Qubbaj

Fixed-Rate Alt-A Collateral

208

(14)

Alt-A Prepayments

222

(6)

Historical Drivers of Prepayments and Defaults

228

(6)

Credit Performance and Enhancement

234

(18)

Practical Portfolio Manager Opportunities and Considerations

252

(7)

Hybrid Adjustable-Rate Mortgages (ARMs)

259

(28)

Anand K. Bhattacharya

Steve Banerjee

Ricardo Horowicz

Wei Wang

Popularity and Issuance of Hybrid ARMs

260

(1)

Characteristics of Hybrid ARM Loans

261

(5)

Hybrid ARM Refinance Incentive

266

(6)

Comparing Hybrid ARM S-Curves

272

(3)

Comparing Hybrid ARM Seasoning Curves

275

(2)

Loan-Level Drivers of Hybrid ARMs

277

(5)

Interest-Only (IO) Hybrid ARMs

282

(2)

Jumbo Hybrid ARM Credit Performance

284

(1)

Conclusions

285

(2)

Hybrids: Product, Performance, Investor Base, and Frameworks to Assess Relative Value

287

(46)

Satish Mansukhani

Adama Kah

Mu'taz Qubbaj

Hybrid Origination and Issuance

288

(2)

Securitization of Hybrids

290

(1)

The Hybrid Borrower

291

(4)

Prepayment Profiles of Hybrids

295

(16)

Trading Conventions in the Hybrid Market

311

(3)

Investors in the Hybrid Secondary Markets

314

(2)

A Conceptual Framework for Relative-Value Assessments of Hybrids

316

(3)

Cap Valuations on Hybrids

319

(1)

Index Levels: Implied Forwards and Historical Peaks

319

(1)

Relative Value of Hybrids

320

(7)

Identifying Characteristics/Features of Hybrids

327

(6)

Interest-Only ARMs

333

(30)

David Liu

Overview of IO ARMs

335

(12)

Credit Implications

347

(6)

Prepayment Experience

353

(8)

Conclusion

361

(2)

Residential Asset-Backed Securities

363

(26)

John McElravey

Market Development

364

(2)

Characteristics of Subprime Borrowers

366

(3)

Prepayment Speeds

369

(3)

Relative-Value Consequences

372

(2)

Key Aspects of Credit Analysis

374

(4)

Structural Considerations

378

(9)

Conclusion

387

(2)

Customized Mortgage-Backed Securities

389

(24)

Anand K. Bhattacharya

Paul Jacob

Historical Perspective

389

(2)

Major Categories of Customized MBS

391

(6)

Determinants of Market Payups

397

(3)

Evaluation of Customized Pools: Current-Yield Approach

400

(1)

Evaluation of Customized Pools: Option-Adjusted Spread Analysis

401

(6)

Measuring the Duration of a Customized Pool

407

(3)

Challenges and Issues in Customized MBS Valuation

410

(3)

The Prepayment and Credit Characteristics of Reperforming FHA/VA Loans

413

(28)

Anand K. Bhattacharya

William S. Berliner

Jonathan Lieber

The Process of Delinquency Curing

414

(2)

Prepayments

416

(10)

Credit Fundamentals: Overview

426

(15)

Prepayment-Penalty Mortgage-Backed Securities

441

(24)

Anand K. Bhattacharya

William S. Berliner

Jonathan Lieber

Legal Framework for Imposition of Prepayment Penalties

442

(1)

Prepayment-Penalty Loan Structures

443

(5)

The Dynamics of the Prepayment Penalty

448

(1)

Borrower and Lender Dynamics

449

(3)

Prepayment Behavior of Prepayment-Penalty Loans

452

(6)

The Impact of Prepayment Penalties on Security Performance and Duration

458

(4)

Conclusions

462

(3)

SECTION THREE MORTGAGE DERIVATIVES: CMOS AND STRIPPED MBS

Stripped Mortgage-Backed Securities

465

(16)

Cyrus Mohebbi

Gary Li

Todd White

Overview of the SMBS Market

466

(4)

Investment Characteristics

470

(10)

Summary

480

(1)

PAC Bond Features and Performance

481

(14)

Linda Lowell

Michael Corsi

Collars

482

(2)

Effective Collars

484

(1)

PAC Collar Drift

485

(1)

How Likely Is Breaking the PAC Bands?

486

(2)

Pay Order and Average Life Stability

488

(2)

Average-Life Profile versus Option-Pricing Models

490

(1)

Wide Window versus Tight Window

491

(2)

Conclusion

493

(2)

Z Bonds

495

(12)

Linda Lowell

The Basic Accrual Structure

495

(4)

How the Z Interacts with Other Bonds in the Structure

499

(4)

Accretion-Directed or VADM Bonds

503

(1)

Z Bonds in PAC Companion Structures

503

(1)

Performance of Z Bonds

504

(2)

Conclusion

506

(1)

Companions with Schedules

507

(16)

Linda Lowell

Companion Basics

508

(4)

Companion TAC Bonds

512

(2)

Reverse TACs

514

(4)

Layered PAC Bonds

518

(4)

Scheduled Companions

522

(1)

Conclusion

522

(1)

Inverse Floating-Rate CMOs

523

(12)

Cyrus Mohebbi

Raymond Yu

Structural Features

523

(3)

Investment Characteristics

526

(4)

Conclusion

530

(5)

SECTION FOUR PREPAYMENT MODELS AND BEHAVIOR

Overview of Recent Prepayment Behavior and Advances in Its Modeling and Valuation

535

(20)

Michael Bykhovsky

Generic Model

536

(12)

Modeling Reliability and Accuracy

548

(1)

Overview of Valuation of the Prepayment Option

549

(2)

Prepayment Score

551

(2)

Conclusion

553

(2)

Agency Prepayment Model: Modeling the Dynamics of Borrower Attributes

555

(48)

Dale Westhoff

V. S. Srinivasan

Housing Turnover

557

(6)

Cash-Out Refinancing

563

(6)

Rate Refinancing

569

(21)

The GNMA Sector: Special Modeling Considerations

590

(6)

Putting It All Together: The Case of the 1992 FNMA 7.5%

596

(2)

The Value of Attribute-Sensitive Prepayment Models

598

(2)

Appendix: Mortgage-Rate Prediction

600

(3)

Loan-Level Prepayment Models

603

(20)

Anand K. Bhattacharya

Steve Banerjee

Minimizing Loan Dispersion

604

(1)

The Full Picture

605

(9)

Loan-Level Modeling

614

(3)

Predictive Strength of Loan-Level Models

617

(2)

Appendix: Use of Survival Analysis in Loan-Level Modeling

619

(4)

Analyzing Specified MBS Pools Using Agency Enhanced Data and Active-Passive Decomposition

623

(22)

Dan Szakallas

Alexander Levin

Andrew Davidson

Prepayment Modeling Using Active-Passive Decomposition

624

(6)

Enhanced Agency Data and Prepayment Modeling

630

(7)

Valuation Consequence: A Payup

637

(8)

Prepayment Models to Value Nonagency MBS

645

(48)

Dale Westhoff

V. S. Srinivasan

Innovative Features: A True Loan-Level Implementation

646

(1)

The Bear, Stearns Nonagency Prepayment Database

647

(1)

The Impact of the Agencies on Nonagency Prepayment Behavior

648

(1)

Defining the Subsectors within the Nonagency Market

649

(3)

Deconstructing Our Nonagency Prepayment Forecast

652

(1)

Defining the Baseline Nonagency Refinancing Profile

653

(1)

Understanding Borrower Self-Selection and Burnout

654

(2)

Modeling Borrower Refinancing Intensity

656

(3)

The Impact of Loan Size on Nonagency Refinancing Behavior

659

(7)

Credit Quality

666

(3)

Rate Premium

669

(2)

Secondary Refinancing Effects: Documentation, Loan Purpose, Occupancy Status

671

(3)

The Yield Curve and Refinancing Transitions

674

(2)

The Value of Updated LTV Ratio Information

676

(1)

Housing Turnover Prepayments: Seasoning and Lock-In

677

(3)

Seasonality

680

(2)

Adverse Selection in Housing Turnover Prepayments

682

(1)

Involuntary Prepayments and Curtailments

682

(1)

Refinancing Efficiency: The Next Frontier

683

(2)

Modeling the Mortgage Rate Process

685

(2)

Model Testing

687

(1)

Conclusion

688

(1)

Appendix: Model Projected versus Actual Results for Representative Deals

689

(4)

A Prepayment Model for Hybrid Mortgages

693

(26)

Dale Westhoff

V. S. Srinivasan

Market Background

693

(10)

Modeling Hybrid Prepayments

703

(13)

Summary and Valuation Implications

716

(3)

Modeling Nonprime Mortgage Prepayment, Delinquency, and Default

719

(40)

Glenn Schultz

Christopher Flanagan

Christopher Muth

Modeling Framework

719

(4)

Model-Building Strategy

723

(8)

Adjustable-Rate Analysis

731

(4)

Fixed-Rate Analysis

735

(4)

Other Factors Influencing Prepayments

739

(5)

Collateral Credit Performance

744

(3)

Involuntary Prepayments

747

(5)

Loss Severity and Cumulative Losses

752

(1)

Summary

753

(6)

SECTION FIVE PORTFOLIO MANAGEMENT TOOLS AND TECHNIQUES

Valuation of Mortgage-Backed Securities

759

(24)

Frank J. Fabozzi

Scott F. Richard

David S. Horowitz

Static Valuation

760

(1)

Dynamic Valuation Modeling

761

(8)

Illustrations

769

(12)

Summary

781

(2)

Risk-Neutral Prepayment Modeling and Valuation with prOAS

783

(16)

Alexander Levin

Andrew Davidson

Prepayment Risk and OAS

784

(2)

Equivalent Risk-Neutral Prepay Model

786

(2)

Stochastic Property of Prepay Risk Factors

788

(1)

A prOAS Pricing Model with Refinancing and Turnover Risk

789

(2)

Determining Prices of Risk: Calibration to TBAs

791

(3)

Valuation of MBS Strips with prOAS

794

(2)

Modernized Greeks

796

(2)

Concluding Remarks

798

(1)

An Option-Theoretic Approach to MBS Valuation

799

(24)

Andrew Kalotay

Deane Yang

Frank J. Fabozzi

Traditional Approaches to MBS Valuation

800

(1)

An Option-Based Prepayment Model for Mortgages

801

(4)

Valuation of Mortgages

805

(8)

A Closer Look at Leapers and Laggards

813

(4)

Valuation of MBS

817

(6)

Approaches for Measuring the Duration of Mortgage-Related Securities

823

(34)

Bennett W. Golub

What Do We Mean by the Term Duration?

825

(7)

Current Approaches to Measuring Mortgage Durations

832

(19)

Comparison of Alternative Duration Measures

851

(1)

Future Approaches to Mortgage Durations

852

(3)

Implications for Investors

855

(2)

Duration and Average-Life Drift of CMOs

857

(12)

David P. Jacob

Tim Lu

Review of Duration and Convexity for Treasuries

858

(1)

Evolution of Average Life for CMOs

859

(2)

Implications for Performance and Risk Management

861

(6)

Conclusion

867

(2)

Managing Against the Lehman Brothers MBS Index: MBS Index Prices

869

(32)

Bruce D. Phelps

Overview

869

(14)

The Lehman MBS Index and Index Pricing

883

(2)

Calculating the Index Price

885

(13)

Conclusion

898

(3)

Managing Against the Lehman Brothers MBS Index: MBS Index Returns

901

(30)

Bruce D. Phelps

Overview

901

(17)

Example: Comparing Return Calculations Using Index and PSA Prices

918

(10)

Conclusion

928

(3)

Dollar Rolls

931

(12)

Frank J. Fabozzi

Steven V. Mann

Determination of the Financing Cost

932

(1)

Illustrations of Dollar Roll Agreements

933

(4)

Risks in a Dollar Roll From the Investor's Perspective

937

(1)

MBS Dollar-Roll Automation

938

(5)

Uncovering the Risk-Adjusted Carry in MBS

943

(8)

Steven Abrahams

Adam Rilander

Uncovering the Risk-Adjusted Carry in TBA

944

(1)

Start with Carry, and Hedge Duration

944

(1)

Move on to Hedging Convexity

945

(1)

Finish with Hedging Long-Term Volatility

946

(2)

The Art of Interpreting the Risk-Adjusted Carry

948

(1)

Summary

948

(3)

Mortgage Credit Quantified

951

(28)

Thomas Zimmerman

Laurent Gauthier

Delinquencies and Defaults

952

(18)

Loss Severity and Losses

970

(7)

Summary

977

(2)

Specified Pool Trades: Ranking the Alternatives

979

(18)

Laurie S. Goodman

Specified Pool Payups

979

(1)

Prepayment Protection: The Data

980

(3)

Credit Curing

983

(6)

Prepayment Protection: The Ranking

989

(1)

Extension Protection: The Data

990

(3)

Ranking Extension Protection

993

(1)

Nonagency Investor Pools

994

(2)

Conclusion

996

(1)

Analysis of Cleanup Calls

997

(12)

Laurent Gauthier

Factors Driving the ``Optimal'' Call Decision

998

(1)

A Tricky Exercise

998

(1)

Nonagency Call Exercises

999

(1)

Call Decisions by Issuer

1000

(1)

Call Decision Timing

1001

(8)

SECTION SIX HEDGING TOOLS AND APPROACHES

A Three-Factor Approach for Hedging Mortgage-Backed Securities

1009

(14)

Kenneth B. Dunn

Frank J. Fabozzi

Michael M. Luo

Roberto M. Sella

Yield-Curve Risk and Key Rate Duration

1009

(3)

How Interest Rates Change Over Time

1012

(1)

How to Implement Three-Factor Hedging

1013

(9)

Summary

1022

(1)

Mortgage Options

1023

(18)

Joseph R. Prendergast

Mortgage Option Markets

1023

(1)

Mortgage Option Users

1024

(5)

Pricing Mortgage Options

1029

(3)

Mortgage Option Risk Characteristics

1032

(5)

Conclusion

1037

(1)

Appendix: Decomposing Mortgage Option Duration and Convexity

1037

(4)

Mortgage Prepayment Derivatives

1041

(12)

Andrew Aymen Samawi

Prepayment Derivatives History and Products

1042

(3)

Prepayment Derivatives Hedging Applications

1045

(6)

Auction Announcements

1051

(1)

Conclusion

1052

(1)

Hedging IOs and Mortgage Servicing

1053

(16)

William L. Smith, Jr.

Laurie S. Goodman

Growth---Mortgage Servicing Industry

1054

(1)

Difficulties in Hedging IOs and MSRs

1054

(2)

Hedge Instruments

1056

(1)

Hedge Correlations

1057

(3)

Measuring Hedge Effectiveness

1060

(1)

Empirical Hedge Results

1060

(2)

Hedging with TBAs

1062

(2)

Use of Options

1064

(1)

A Few Additional Comments

1065

(2)

Thoughts On Servicing Models

1067

(1)

Caveats

1067

(1)

Conclusion

1068

(1)

Mark-to-Market Methodology, Mortgage Servicing Rights, and Hedging Effectiveness

1069

(36)

Bennett W. Golub

Sree Sudha Yerneni

Approach to Back Testing

1074

(13)

Extending the Analysis to Servicing

1087

(2)

Alternative Hedge Methodology (``Swap + Mortgage'' Hedge)

1089

(6)

Conclusion

1095

(2)

Appendix A: Monthly Durations and Prepayment Speeds

1097

(5)

Appendix B: OAS, Spreads, and Yields Used in Computing Daily Prices

1102

(1)

Appendix C: OASs and Key Rate Durations as of 7/31/03

1103

(2)

Prepayment-Linked Notes

1105

(14)

Laurie S. Goodman

Themes and Variations

1105

(2)

Why Will Prepayment-Linked Notes Gain Popularity?

1107

(1)

Relative Value

1108

(8)

Conclusion

1116

(3)

SECTION SEVEN COMMERCIAL MORTGAGE-BACKED SECURITIES

Commercial Mortgage-Backed Securities

1119

(14)

Anthony B. Sanders

The CMBS Deal

1119

(6)

The Underlying Loan Portfolio

1125

(4)

The Role of the Servicer

1129

(2)

Loan Origination, the Lemons Market, and the Pricing of CMBS

1131

(1)

Summary

1132

(1)

The Impact of Structuring on CMBS Bond Class Performance

1133

(24)

David P. Jacob

James M. Manzi

Frank J. Fabozzi

Loan Cash Flow: The Raw Material for CMBS

1136

(5)

CMBS Structures

1141

(4)

The Impact of Maturity Dispersion

1145

(1)

The Impact of Coupon Dispersion

1146

(1)

The Impact of Prepayments

1147

(2)

The Impact of Defaults

1149

(1)

Sample Default Scenarios

1150

(1)

Effects of Servicer Modifications on CMBS

1151

(4)

Summary

1155

(2)

Investment Characteristics of GNMA Project Loan Securities

1157

(30)

Arthur Q. Frank

Tim Lu

A Brief History of GNMA Multifamily Pools

1157

(1)

Major FHA Project Loan Insurance Programs

1158

(5)

Prepayment Behavior of GNMA Multifamily Pools

1163

(12)

Default Behavior of GNMA Multifamily Pools

1175

(1)

Cumulative Defaults by Production Year and the GNMA Project Loan Default Curve

1176

(5)

Recent Breakdown of GNMA Multifamily Prepayments into Defaults, Refinancings with Penalties, and Refinancings without Penalties

1181

(1)

The Refinancing History of Health Care Loans Compared with Apartment Complexes

1181

(4)

On the Investment Characteristics of GNMA Multifamily Pools and REMICs

1185

(2)

CMBS Collateral Performance: Measures and Valuations

1187

(12)

Philip O. Obazee

Duane C. Hewlett

Mortgage Loan Default Rates and Loss Severities

1187

(3)

Factors Influencing Default Rates and Loss Severity

1190

(3)

Age

1193

(1)

Default Rate, Loss Severity, and Valuation Issues

1193

(5)

Conclusion

1198

(1)

Value and Sensitivity Analysis of CMBS IOs

1199

(10)

Philip O. Obazee

Duane C. Hewlett

Value Drivers of CMBS IOs

1200

(5)

CMBS IO Relative Value

1205

(3)

Conclusion

1208

(1)

Cash-Flow CDOs for CMBS Investors

1209

(8)

Peter Leffler

John Malysa

Jennifer Story

Susan S. Merrick

Capital Structure

1210

(3)

Reinvestment (or Revolving) Period

1213

(1)

Cash-Flow Diversion Tests

1214

(1)

Preferred-Share Caps and Reverse Turbos

1215

(1)

Interest-Rate Hedging

1215

(1)

Conclusion

1216

(1)

Index

1217

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The Handbook of Mortgage-Backed Securities

The Handbook of Mortgage-Backed Securities

9780071460743

0071460748

Summary

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Table of Contents

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The Handbook of Mortgage-Backed Securities

The Handbook of Mortgage-Backed Securities

9780071460743

0071460748

Summary

Author Biography

Table of Contents

Supplemental Materials

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