Transcript Mortgage-Backed Security Markets -

MBS MODULE
MODULE 7
Mortgage-Backed Security
Markets
-- Secondary Mortgage Markets
•Mortgage Related Securities
•Mortgage Collateral
•Why Should There Be a Secondary
Market?
Buys
Mortgages
Secondary Sells
Mortgage
MRS
Market
Originator
Cash
Cash
Originator
Mortgage
(-)
Cash (+)
Investor
Agency
Mortgage (+)
MRS (+)
Investor
MRS (+)
Cash (-)
MRS: Basic Characteristics
• Credit Enhancement
• Avoid Double Taxation and
Bankruptcy
• Tailor Cash Flows from Mortgages to
Investors
MRS: Phylum -- Flora & Fauna
•
•
•
•
Mortgage Pass-Through Securities
Mortgage-Backed Bonds
Mortgage Pay-through Bonds
Collateralized Mortgage Obligations
Credit Enhancement Techniques
• Pass-Through
-- FHA/VA Loans
• Mortgage-Backed Bonds -- Agency Equity
or Pool Revenue
• Mortgage Pay-- Agency Equity
Through Bonds
Pool Insurance
• Collateralized
-- Agency Equity Pool
Mortgage Obligations
Insurance Letter of
Credit
• Debts of Agency
-- FHA/VA Loans in
Pool
Mortgage-Backed Bond: Cashflows
Buys
Originator
Mortgages
Sells
Firm
MBB
Cash
Cash
$100
$125
Firm
$125 Mortgages
MBB $100
Equity $25
Investor
CMO Structure
Maturity
Assets
Mortgages
Total Assets
Liabilities
A
B
C
Z
Liabilities
Equity
Total
30
Coupon
$
Total $
10.0%
106
106
5-9
9-14
12-17
28-30
9.25%
9.50%
10.0%
10.5%
30
30
25
15
100
6
106
Tax and Accounting for MRS
- Guarantor Trust -- Avoids Double
Taxation
1. Limited Life
2. Self-Liquidating
3. No Asset Management
REMIC Cash Flow Structure
Buys
Originator
Mortgages
Sells
Secondary
Market
Agency
REMIC
Investor
Cash
Cash
Transfers or Sells Mortgages “off balance” Sheet
Trust or
Separate
Accounting
Activity
Secondary Market Players
- FNMA
- GNMA
- FHLMC
Secondary Market Players
- Federal Credit Agencies
 Farm Credit system
 Farm Credit Assistance Financial Corp.
 Federal Agricultural Mortgage Corp.
(Farmer Mae)
 Farmers Home Administration
(FmHA)
 Financing Corp.
(FICO)
 Federal Financing Bank
(FFB)
 State and Local Credit Agencies
- HFA’s
- Private Sector Firms
- First Boston, et. al.
- “RTC” Paper
Regulation of GSE’s
FNMA/FHLMC Capital Requirements
- Interest Risks
- Default Risks
- Management and Operating Risks
Valuation of MRS
• Mortgage Derivative Securities
Interest Rates Affect both Amounts of
Cash Flows and Time Value of Cash
Flows
• MRS are Interest-Contingent Securities
MRS Fundamentals
1. Principal of Pool is Fixed in Total (No
Defaults)
2. Interest Payments Depend Upon Past
Amortization
3. Changes in Interest Rates Affect Timing of
Prepayments
Pass-Throughs and Prepayment
Rates
1.
2.
3.
4.
5.
Twelve Year Prepaid Life
Constant Prepayment Rate (CPR)
FHA Experience
Public Securities Association (PSA)
Econometric Prepayment Models
PSA Model
6%
100% PSA
30
Time
Econometric Models
Age of Mortgage
Seasonal
Current and Projected Interest Rate Relative
to Mortgage Coupon
Geography
Borrower Characteristics
- Age
- Income
- Wealth
Interest Rates and Prepay Behavior
100%
.
-
o
Differential Between
Market and Coupon
+
•SWAPS
- Mortgage Pools for MRS
- Used by S&L’s Because of
Liquidity