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 PAC Support 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 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 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
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 the Journal 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 for Asset Securitization Report.