固定收益證券CollaterizedMortgageObligationsandStrippedMortgageBackedSecurities課件

Copyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-1

Chapter12

CollaterizedMortgageObligationsandStrippedMortgage-BackedSecurities

Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-2LearningObjectivesAfterreadingthischapter,youwillunderstandwhatamortgageiswhyandhowanagencycollateralizedmortgageobligationiscreatedwhatismeantbyREMICandwhyCMOsarereferredtoasREMICsorREMICstructureswhatasequential-payCMOishowtheaveragelifeofasequential-payCMOcomparestothatofthecollateralfromwhichitiscreatedwhatanaccrualtrancheisanditseffectontheaveragelifeofsequential-paytranchesintheCMOstructurehowafloaterandaninversefloaterarecreatedfromaCMOtrancheCopyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-3LearningObjectives(continued)Afterreadingthischapter,youwillunderstandwhataplannedamortizationclasstrancheisandhowitiscreatedhowtheprepaymentprotectionforaplannedamortizationclasschangesovertimewhatasupporttrancheisandthesubstantialprepaymentrisktowhichitexposesinvestorswhatasupportbondwithascheduleiswhatanotionalIOisandhowitiscreatedhowagencystrippedmortgage-backedsecuritiesarecreatedthevarioustypesofagencystrippedmortgage-backedsecuritiestheinvestmentcharacteristicsofagencystrippedmortgage-backedsecuritiesCopyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-4AgencyCollateralizedMortgageObligationsCollateralizedmortgageobligations(CMOs)arebondclassescreatedbyredirectingthecashflowsofmortgage-relatedproductssoastomitigateprepaymentrisk.ThemerecreationofaCMOcannoteliminateprepaymentrisk;itcanonlytransferthevariousformsofthisriskamongdifferentclassesofbondholders.Thebondclassescreatedarecommonlyreferredtoastranches.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-5AgencyCollateralizedMortgageObligations

(continued)Sequential-PayTranchesThefirstCMOwascreatedin1983andwasstructuredsothateachclassofbondwouldberetiredsequentially.Suchstructuresarereferredtoassequential-payCMOs.ACMOiscreatedbyredistributingthecashflow(interestandprincipal)tothedifferenttranchesbasedonpaymentrules.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-6Exhibit12-1FJF-01:HypotheticalFour-TrancheSequential-PayStructureaTrancheParAmountCouponRate(%)A$194,500,0007.5B36,000,0007.5C96,500,0007.5D73,000,0007.5$400,000,000aPaymentrules:1.Forpaymentofperiodiccouponinterest:Disburseperiodiccouponinteresttoeachtrancheonthebasisoftheamountofprincipaloutstandingatthebeginningoftheperiod.2.Fordisbursementofprincipalpayments:DisburseprincipalpaymentstotrancheAuntilitispaidoffcompletely.AftertrancheAispaidoffcompletely,disburseprincipalpaymentstotrancheBuntilitispaidoffcompletely.AftertrancheBispaidoffcompletely,disburseprincipalpaymentstotrancheCuntilitispaidoffcompletely.AftertrancheCispaidoffcompletely,disburseprincipalpaymentstotrancheDuntilitispaidoffcompletely.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-7AgencyCollateralized

MortgageObligations

(continued)Sequential-PayTranchesEachtranchereceivesperiodiccouponinterestpaymentsbasedontheamountoftheoutstandingbalanceatthebeginningofthemonth.Atrancheisnotentitledtoreceiveprincipaluntiltheentireprincipaloftheprecedingtranchehasbeenpaidoff.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-8AgencyCollateralizedMortgageObligations

(continued)Sequential-PayTranchesThereisconsiderablevariabilityoftheaveragelifeforthetranches.Exhibit12-3(seeOverhead12-9)reportstheaveragelifeofthecollateralandthefourtranchesassumingdifferentprepaymentspeeds.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-9Exhibit12-3AverageLifefortheCollateralandtheFourTranchesofFJF-01PrepaymentSpeed(PSA)AverageLifeforCollateralTrancheATrancheBTrancheCTrancheD5015.117.4815.9821.0227.2410011.664.9010.8615.7824.581658.763.487.4911.1920.272007.683.056.429.6018.113005.632.324.646.8113.364004.441.943.705.3110.345003.681.693.124.388.356003.161.512.743.756.967002.781.382.473.305.95Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-10AgencyCollateralizedMortgageObligations

(continued)Thereissomeprotectionprovidedforeachtrancheagainstprepaymentrisk.Shorter-termtrancheisprotectedagainstextensionrisk.Othertranchesareprovidedprotectionagainstcontractionrisk.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-11AgencyCollateralizedMortgageObligations

(continued)Example,page279Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-12AgencyCollateralized

MortgageObligations

(continued)AccrualBondsInmanysequential-payCMOstructures,atleastonetranchedoesnotreceivecurrentinterest.Instead,theinterestforthattranchewouldaccrueandbeaddedtotheprincipalbalance.SuchabondclassiscommonlyreferredtoasanaccrualtrancheoraZbond(becausethebondissimilartoazero-couponbond).Theinterestthatwouldhavebeenpaidtotheaccrualbondclassisthenusedtospeedupthepaydownoftheprincipalbalanceofearlierbondclasses.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-13Exhibit12-4FJF-02:HypotheticalFour-TrancheSequential-PayStructurewithanAccrualBondClassaTrancheParAmountCouponRate(%)A$194,500,0007.5B36,000,0007.5C96,500,0007.5Z(accrual)73,000,0007.5$400,000,000aPaymentrules:1.Forpaymentofperiodiccouponinterest:DisburseperiodiccouponinteresttotranchesA,B,andConthebasisoftheamountofprincipaloutstandingatthebeginningoftheperiod.FortrancheZ,accruetheinterestbasedontheprincipalplusaccruedinterestintheprecedingperiod.TheinterestfortrancheZistobepaidtotheearliertranchesasaprincipalpaydown.2.Fordisbursementofprincipalpayments:DisburseprincipalpaymentstotrancheAuntilitiscompletelypaidoff.AftertrancheAispaidoffcompletely,disburseprincipalpaymentstotrancheBuntilitispaidoffcompletely.AftertrancheBispaidoffcompletely,disburseprincipalpaymentstotrancheCuntilitispaidoffcompletely.AftertrancheCispaidoffcompletely,disburseprincipalpaymentstotrancheZ,untiltheoriginalprincipalbalanceplusaccruedinterestispaidoffcompletely.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-14AgencyCollateralizedMortgageObligations

(continued)TheaveragelivesfortranchesA,B,andCareshorterinFJF-02thaninFJF-01becauseoftheinclusionoftheaccrualbond.Forexample,at165PSA,theaveragelivesareasfollows:Thereasonfortheshorteningofthenonaccrualtranchesisthattheinterestthatwouldbepaidtotheaccrualbondisbeingallocatedtotheothertranches.TrancheZinFJF-02willhavealongeraveragelifethanthatoftrancheDinFJF-01.StructureFJF-02TrancheB2.907.87TrancheATrancheC5.86FJF-013.487.4911.19Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-15AgencyCollateralizedMortgageObligations

(continued)Floating-RateTranchesFloating-ratetranchescanbecreatedfromfixed-ratetranchesbycreatingafloaterandaninversefloater.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-16Exhibit12-6FJF-03:HypotheticalFive-TrancheSequential-PayStructurewithFloater,InverseFloater,andAccrualBondClassTrancheParAmountCouponRate(%)A$194,500,0007.5B36,000,0007.5FL72,375,0001-monthLIBOR+0.50IFL24,125,00028.50–3×(1-monthLIBOR)Z(accrual)73,000,0007.5$400,000,000Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-17AgencyCollateralizedMortgageObligations

(continued)Floating-RateTranchesUnlikeafloating-ratenoteinthecorporatebondmarket,whoseprincipalisunchangedoverthelifeoftheinstrument,thefloater’sprincipalbalancedeclinesovertimeasprincipalpaymentsaremade.Theprincipalpaymentstothefloateraredeterminedbytheprincipalpaymentsfromthetranchefromwhichthefloateriscreated.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-18AgencyCollateralizedMortgageObligations(continued)Floating-RateTranchesInversefloaterswithawidevarietyofcouponleveragesareavailableinthemarket.Participantsreferto:low-leverageinversefloatersasthosewithacouponleveragebetween0.5and2.1medium-leverageasthosewithacouponleveragehigherthan2.1butnotexceeding4.5high-leverageasthosewithacouponleveragehigherthan4.5.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-19AgencyCollateralizedMortgageObligations

(continued)TheCMOinnovationsattractedmanyinstitutional.InMarch1987,theM.D.C.MortgageFundingCorporationCMOSeries0includedaclassofbondsreferredtoasstabilizedmortgagereductionterm(SMRT)bonds.AnotherclassinitsCMOSeriesPwasreferredtoasplannedamortizationclass(PAC)bonds.TheOxfordAcceptanceCorporationIIISeriesCCMOsincludedaclassofbondsreferredtoasaplannedredemptionobligation(PRO)bonds.Thecharacteristiccommontothesethreebondsisthatiftheprepaymentsarewithinaspecifiedrange,thecashflowpatternisknown.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-20AgencyCollateralizedMortgageObligations

(continued)ThegreaterpredictabilityofthecashflowforclassesofPACbondsoccursbecausethereisaprincipalrepaymentschedulethatmustbesatisfied.ThegreatercertaintyofthecashflowforthePACbondscomesattheexpenseofthenon-PACclasses,calledsupport

orcompanionbonds.Itisthesebondsthatabsorbtheprepaymentrisk.BecausePACbondshaveprotectionagainstbothextensionriskandcontractionrisk,theyaresaidtoprovidetwo-sidedprepaymentprotection.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-21Exhibit12-8FJF-04:CMOStructurewithOnePACBondandOneSupportBondaTrancheParAmountCouponRate(%)P(Pac)$243,800,0007.5S(Support)156,200,0007.5$400,000,000aPaymentrules:1.Forpaymentofperiodiccouponinterest:Disburseperiodiccouponinteresttoeachtrancheonthebasisoftheamountofprincipaloutstandingatthebeginningoftheperiod.2.Fordisbursementofprincipalpayments:DisburseprincipalpaymentstotranchePbasedonitsscheduleofprincipalrepayments.TranchePhasprioritywithrespecttocurrentandfutureprincipalpaymentstosatisfytheschedule.AnyexcessprincipalpaymentsinamonthovertheamountnecessarytosatisfytheschedulefortrancheParepaidtotrancheS.WhentrancheSispaidoffcompletely,allprincipalpaymentsaretobemadetotranchePregardlessoftheschedule.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-22AgencyCollateralizedMortgageObligations(continued)Exhibit12-9(seeOverhead12-23)reportstheaveragelifeforthePACbondandthesupportbondinFJF-04assumingvariousactualprepaymentspeeds.Noticethatbetween90PSAand300PSA,theaveragelifeforthePACbondisstableat7.26years.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-23Exhibit12-9AverageLifeforPacBondandSupportBondinFJF-04AssumingVariousPrepaymentSpeedsPrepaymentRate(PSA)PACBond(P)SupportBond(S)1015.9727.26509.4424.00907.2618.561007.2618.561507.2612.571657.2611.162007.268.382507.265.373007.263.133506.562.514005.922.174505.381.945004.931.777003.701.37Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-24AgencyCollateralizedMortgageObligations

(continued)CreatingaSeriesofPACBondsMostCMOPACstructureshavemorethanoneclassofPACbonds.ThetotalparvalueofthesixPACbondsisequalto$243.8million,whichistheamountofthesinglePACbondinFJF-04.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-25Exhibit12-10FJF-05:CMOStructurewithSixPACBondsandOneSupportBondaTrancheParAmountCouponRate(%)P-A

$85,000,0007.5P-B

8,000,0007.5P-C

35,000,0007.5P-D

45,000,0007.5P-E

40,000,0007.5P-F

30,800,0007.5S

156,200,0007.5$400,000,000aPaymentrules:1.Forpaymentofperiodiccouponinterest:Disburseperiodiccouponinteresttoeachtrancheonthebasisoftheamountofprincipaloutstandingatthebeginningoftheperiod.2.Fordisbursementofprincipalpayments:DisburseprincipalpaymentstotranchesP-AtoP-Fbasedontheirrespectiveschedulesofprincipalrepayments.TrancheP-Ahasprioritywithrespecttocurrentandfutureprincipalpaymentstosatisfytheschedule.AnyexcessprincipalpaymentsinamonthovertheamountnecessarytosatisfytheschedulefortrancheP-AarepaidtotrancheS.WhentrancheP-Aispaidoffcompletely,trancheP-Bhaspriority,thentrancheP-C,andsoon.WhentrancheSispaidoffcompletely,allprincipalpaymentsaretobemadetotheremainingPACtranchesinorderofpriorityregardlessoftheschedule.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-26AgencyCollateralizedMortgageObligations(continued)CreatingaSeriesofPACBondsFromaPACbondinFJF-04withanaveragelifeof7.26,wehavecreatedsixbondswithanaveragelifeasshortas2.58years(P-A)andaslongas16.92years(P-F)ifprepaymentsstaywithin90PSAand300PSA.Whereastheinitialcollarmaybe90to300PSA,theeffectivecollariswiderfortheshorterPACtranches.Exhibit12-12(seeOverhead12-28)showstheeffectivecollarforthesixPACtranchesinFJF-04.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-27Exhibit12-11AverageLifefortheSixPACBondsinFJF-05AssumingVariousPrepaymentSpeedsPrepaymentRate(PSA)PACBondsP-AP-BP-CP-DP-EP-F08.4614.6116.4919.4121.9123.76503.586.828.3611.3014.5018.20902.584.725.787.8910.8316.921002.584.725.787.8910.8316.921502.584.725.787.8910.8316.921652.584.725.787.8910.8316.922002.584.725.787.8910.8316.922502.584.725.787.8910.8316.923002.584.725.787.8910.8316.923502.584.725.496.959.2414.914002.574.374.916.178.3313.214502.503.974.445.567.4511.815002.403.654.075.066.7410.657002.062.823.103.754.887.51Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-28Exhibit12-12EffectiveCollarsforEachPacTrancheinFJF-04AmountofSupportBonds:$156.2MillionTrancheEffectiveCollarP-A90–450PSAP-B90–350PSAP-C90–300PSAP-D90–300PSAP-E90–300PSAP-F90–300PSACopyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-29Copyright?2009PearsonEducation,nc.PublishingasPrenticeHallAgencyCollateralizedMortgageObligations(continued)PACWindowThelengthoftimeoverwhichscheduledprincipalrepaymentsaremadeisreferredtoasthewindow.APACwindowcanbewideornarrow.ThenarroweraPACwindow,themoreitresemblesacorporatebondwithabulletpayment.PACbuyersappeartoprefertightwindows.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-3012-30AgencyCollateralizedMortgageObligations(continued)EffectiveCollarsandActualPrepaymentsThecreationofamortgage-backedsecuritycannotmakeprepaymentriskdisappear.Thereductioninprepaymentrisk(bothextensionriskandcontractionrisk)thataPACoffersmustcomefromsomewhere.Theprepaymentprotectioncomefromthesupportbonds.Itisthesupportbondsthatforegoprincipalpaymentsifthecollateralprepaymentsareslow;supportbondsdonotreceiveanyprincipaluntilthePACbondsreceivethescheduledprincipalrepayment.ThisreducestheriskthatthePACbondswillextend.Itisthesupportbondsthatabsorbanyprincipalpaymentsinexcessofthescheduledprincipalpaymentthataremade.ThisreducesthecontractionriskofthePACbonds.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-31AgencyCollateralizedMortgageObligations

(continued)EffectiveCollarsandActualPrepaymentsBustedmeansthattheprepaymentprotectionisreducedandisusedintheCMOmarketwhenaPACscheduleisbroken.AneffectivecollarforaseasonedPACisthelowerPSAandtheupperPSAthatcanoccurinthefutureandstillallowmaintenanceofthescheduleofprincipalrepayments.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-32AgencyCollateralizedMortgageObligations(continued)EffectiveCollarsandActualPrepaymentsTheeffectivecollarchangeseverymonth.AnextendedperiodoverwhichactualprepaymentsarebelowtheupperrangeoftheinitialPACcollarwillresultinanincreaseintheupperrangeoftheeffectivecollar.Thisisbecausetherewillbemorebodyguardsaroundthananticipated.AnextendedperiodofprepaymentsslowerthanthelowerrangeoftheinitialPACcollarwillraisethelowerrangeoftheeffectivecollar.Thisisbecauseitwilltakefasterprepaymentstomakeuptheshortfallofthescheduledprincipalpaymentsnotmadeplusthescheduledfutureprincipalpayments.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-33AgencyCollateralizedMortgageObligations(continued)EffectiveCollarsandActualPrepaymentsThePACschedulemaynotbesatisfiedeveniftheactualprepaymentsneverfalloutsidetheinitialcollar.Thismayseemsurprisingbecauseourpreviousanalysisindicatedthattheaveragelifewouldnotchangeifprepaymentsareateitherextremeoftheinitialcollar;however,ourpreviousanalysishasbeenbasedonasinglePSAspeedforthelifeofthestructure.Exhibit12-14(seeOverhead12-35)showstheaveragelifetwoyearsfromnowforthePACbondinFJF-04assumingthatprepaymentsare300PSAforthefirst24months.Noticethattheaveragelifeisstableatsixyearsiftheprepaymentsforthefollowingmonthsarebetween115PSAand300PSA.Thatis,theeffectivePACcollarisnolongertheinitialcollar.Instead,thelowercollarhasshiftedupward.Thismeansthattheprotectionfromyear2onisfor115to300PSA,anarrowerbandthaninitiallyeventhoughtheearlierprepaymentsdidnotexceedtheinitialuppercollar.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-34Exhibit12-14AverageLifeTwoYearsfromNowforPACBondofFJF-04AssumingPrepaymentsof300PSAforFirst24MonthsPSAfromYear2onAverageLife(years)956.431056.111156.011206.001256.003006.003055.62Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-35AgencyCollateralizedMortgageObligations

(continued)ProvidingGreaterPrepaymentProtectionforPACsTherearetwowaystoprovidegreaterprotectionforPACbonds:lockoutsreversePACstructuresOnewaytoprovidegreaterprotectionforPACbondsistousePACP-Atocreatemoresupportbonds.SuchaCMOstructurewithnoprincipalpaymentstoaPACbondclassintheearlieryearsisreferredtoasalockoutstructure.ACMOstructurerequiringanyexcessprincipalpaymentstobemadetothelongerPACbondsafterallsupportbondsarepaidoffiscalledareversePACstructure.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-36AgencyCollateralizedMortgageObligations(continued)TargetedAmortizationClassBondsAtargetedamortizationclass(TAC),incontrast,hasasinglePSAratefromwhichthescheduleofprincipalrepaymentisprotected.Itprovidesprotectionagainstextensionriskbutnotcontractionrisk.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-37AgencyCollateralizedMortgageObligations(continued)NotionalIOSIfthereisexcessinterestbetweenthecouponrateonthetranchesandthecouponinterestonthecollateral,aspecialtrancheiscreatedthatreceivestheexcesscouponinterest.Thistrancheiscalledanotionalinterestonly(IO)classandalsoreferredtoasastructuredIO.ToseehowanotionalIOiscreated,considertheCMOstructureshowninExhibit12-15(seeOverhead12-41),FJF-06.Thenotionalamountistheamountonwhichtheinterestpaymentswillbedetermined,nottheamountthatwillbepaidtotheholderofthisbond.Mathematically,thisnotionalamountisfoundasfollows:

whereexcessinterest=collateralcouponrate–tranchecouponrate.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-38Exhibit12-15FJF-06:HypotheticalFiveTrancheSequentialPaywithanAccrualTrancheandanInterest-OnlyTrancheaTrancheParAmountNotionalAmountCouponRate(%)A$194,500,0006.00B36,000,0006.50C96,500,0007.00Z73,000,0007.25IO52,566,6677.50aPaymentrules:1.Forpaymentofperiodiccouponinterest:DisburseperiodiccouponinteresttotranchesA,B,C,andConthebasisoftheamountofprincipaloutstandingatthebeginningoftheperiod.FortrancheZ,accruetheinterestbasedontheprincipalplusaccruedinterestintheprecedingperiod.TheinterestfortrancheZistobepaidtotheearliertranchesasaprincipalpaydown.DisburseperiodicinteresttotheIOtranchebasedonthenotionalamountatthebeginningoftheperiod.2.Fordisbursementofprincipalpayments:DisburseprincipalpaymentstotrancheAuntilitispaidoffcompletely.AftertrancheAispaidoffcompletely,disburseprincipalpaymentstotrancheBuntilitispaidoffcompletely.AftertrancheBispaidoffcompletely,disburseprincipalpaymentstotranchesCuntilitispaidoffcompletely,disburseprincipalpaymentstotrancheZuntiltheoriginalprincipalbalanceplusaccruedinterestispaidoffcompletely.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-39AgencyStrippedMortgage-BackSecuritiesAgencystrippedmortgage-backedsecurities(SMBSs),introducedbyFannieMaein1986,areanotherexampleofderivativemortgageproducts.ASMBSiscreatedbyalteringthedistributionofprincipalandinterestCopyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-40AgencyStrippedMortgage-BackSecurities

(continued)Interest-Only/Principal-OnlyStripsInearly1987,strippedMBSbegantobeissuedwherealltheinterestisallocatedtooneclass(theIOclass)andalltheprincipaltotheotherclass(thePOclass).TheIOclassreceivesnoprincipalpayments.IOsandPOsarereferredtoasmortgagestrips.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-41AgencyStrippedMortgage-BackSecurities

(continued)Interest-Only/Principal-OnlyStripsThePOsecurityispurchasedatasubstantialdiscountfromparvalue.Theyieldaninvestorwillrealizedependsonthespeedatwhichprepaymentsaremade.Thefastertheprepayments,thehighertheyieldtheinvestorwillrealize.WhenanIOispurchasedthereisnoparvalue.IncontrasttothePOinvestor,theIOinvestorwantsprepaymentstobeslow.ThereasonisthattheIOinvestorreceivesonlyinterestontheamountoftheprincipaloutstanding.Asprepaymentsaremade,theoutstandingprincipaldeclines,andlessdollarinterestisreceived.Infact,ifprepaymentsaretoofast,theIOinvestormaynotrecovertheamountpaidfortheIO.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall12-42Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying,recording,orotherwise,withoutthepriorwrittenpermissionofthepublisher.PrintedintheUnitedStatesofAmerica.Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall13-43

Chapter13

NonagencyResidentialMortgage-BackedSecurities

Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall13-44LearningObjectivesAfterreadingthischapter,youwillunderstandthetwosectorsofthenonagencymortgage-backedsecuritiesmarket:privatelabelandsubprimethestructureofanonagencymortgage-backedsecuritiestransactionhowcreditriskisredistributedinanonagencymortgage-backedsecuritiestransactionthedifferentcreditenhancementmechanismshowdefaultsaremeasuredhowprepaymentsaremeasuredthesubprimecrisisinthesummerof2007Copyright?2010PearsonEducaCopyright?2010PearsonEducation,Inc.PublishingasPrenticeHall13-45CreditEnhancementSecuritieswithoutagovernmentguaranteeoraGSEguaranteemustbestructuredwithadditionalcreditsupporttoreceiveaninvestment-graderating.Thisadditionalcreditsupportisneeded