Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques »

Frank J. Fabozzi is Professor in the Practice of Finance in the School of Management at Yale University. Prior to joining the Yale faculty, he was a Visiting Professor of Finance in the Sloan School at MIT. He is a Fellow of the International Center for Finance at Yale University and on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton University. Professor Fabozzi is the editor of the Journal of Portfolio Management and an associate editor of the Journal of Fixed Income. He earned a doctorate in economics from the City University of New York in 1972. In 2002 was inducted into the Fixed Income Analysts Society’s Hall of Fame and is the 2007 recipient of the C. Stewart Sheppard Award given by the CFA Institute. He earned the designation of Chartered Financial Analyst and Certified Public Accountant. He has authored and edited numerous books in finance.

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.

Over the past quarter of a century, the market for mortgage-related securities has become the largest cash financial market in the world. The growing size and scope of the mortgage-backed securities (MBS) market—along with the broad range of products related to it—has forced many financial professionals to become more mindful of developments in MBS markets and the factors driving MBS issuance and performance.

Frank Fabozzi, Anand Bhattacharya, and William Berliner all have many years of experience working in the fixed-income markets, and have witnessed many cycles of change in the mortgage and MBS sectors. And now, with Mortgage-Backed Securities, they share their knowledge and insights on many of the product and structuring innovations that have impacted this financial market.

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—including detailed explanations of how MBS products, such as agency CMOs and mortgage ABS, are structured—as well as in-depth discussions of option-adjusted spreads, a variety of duration measures, and other analytical approaches used to assess relative value.

Divided into four comprehensive parts, this reliable resource:

Part One: provides you with a complete introduction to mortgage and MBS markets

Part Two: highlights the essential elements of prepayment and default behavior and performance metrics

Part Three: illustrates a variety of structuring techniques, with an emphasis on defining both differences and commonalities across various mortgage products and techniques

Part Four: describes the methodologies and techniques used to value MBS products and assess interest-rate risk

An information-filled Appendix rounds out the discussion of mortgage-backed securities. This part of the book will introduce you to a new approach to mortgage valuation—called the option theoretic approach—which has been adopted by a number of Wall Street firms and received a great deal of interest from market professionals.

A proliferation in the types of different loan products; the growth of lending to borrowers with non-traditional financial profiles; and a fluctuation in real estate prices have created the need for a reassessment of the MBS universe. Filled with in-depth insights and expert advice, Mortgage-Backed Securities offers you a realistic assessment of this field and outlines the products, structures, and analytical techniques about which any successful investor needs to know.

Preface.

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.

MBS Trading.

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.

Prepayment Behavior.

Drivers of Prepayment Activity.

Additional Factors Affecting Prepayment Speeds.

Prepayment Behavior of “Nonfixed-Payment” Products.

Summary.

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.

Time Tranching.

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.

Zero-Volatility Spread.

Valuation Using Monte Carlo Simulation and OAS Analysis.

Total Return Analysis.

Chapter 11: Measuring MBS Interest Rate Risk.

Duration.

Convexity.

Yield Curve Risk.

Other Risk Measures.

Illustration of Risk Measures.

Summary.

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.

Summary.

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.

Summary.

INDEX.