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Mortgage-Backed Securities新發展

姜堯民政大財管系副教授

于台科大企業管理研究所

2000/10/26

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Financial Intermediation

Traditionally, banks

1) originate a loan;

2) retain the loan in their portfolio of assets, thereby accepting the credit risk associated with the loan;

3) service the loan (collect payments and take legal action if payments were not made; and

4) obtain funds from the public with which to finance their assets.

money moneysaver commercial borrowers

banksaving contract lending contract

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Securitization

Recently, banks

1) originate a loan;

2) sell the loan to an investment banking firm that creates a security backed by the pool of loans;

3) the investment bankers obtain credit risk insurance for the pool of loans from an insurance company;

4) the investment banker can sell the right to serve the loan to another bank or a company specializing in servicing loans; and

5) the investment banking firm can sell the securities to individual and institutional investors.

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Securitizationlending money money money

originator trust underwriter

lending security security

contract

borrowers credit investors

enhancement

payments payments

server

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OUTSTANDING VOLUME OF MORTGAGE SECURITIES 1992-1999

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•Government National Mortgage Association (GNMA, Ginnie Mae)•Federal National Mortgage Association (FNMA, Fannie Mae)•Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac)

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Fannie Mae MBS Issuance

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Mortgage-backed securities

- Mortgage passthrough securities, or simply, passthrough

- Collateralized mortgage obligations (CMOs)

- Stripped mortgage-backed securities

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Risks faced by mortgage finance intermediaries

• Credit risk:

• risk that money lent might not be repaid

• Cash flow risk:

• risk that market conditions will alter scheduled cash flows

– prepayment risk

– inflation risk

– exchange risk

– interest rate risk

• Liquidity risk:

• risk that money will be needed before it is due

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Mortgage Passthrough Securities

- Most popular form of mortgage-backed security

- Represents sale of mortgages

- Taxed only at investor level

- Commits to pay P,I, and prepayments each month as received

- "Modified" pass through guarantees timely payment

- Greatest volume issued by FNMA, FHLMC and GNMA surrogates

- Private entities also issue

- Swap program provided more options to originators

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Collateralized Mortgage Obligations

- Debt instrument secured by pool of mortgages

- Appeals to investors who can't tolerate prepayment

- A Derivative: different from the underlying mortgages even though CMO distributions are derived from the mortgages

- Issued in multiple maturities or tranches

- Cash flow is distributed in sequential order (A,B,C,Z tranches)

- A method for issue debt, reduce prepayment risk and shift remaining prepayment risk to the investor

- Quoted with a stated maturity within a range

- Overcollateralized

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• Collateralized Mortgage Obligations (CMOs): The CMO structure offers issuers a flexible tool with which to design tranches to meet investor needs and respond to market conditions. There are several derivations, including:

• Sequential pay (SEQ) classes are the most basic classes within a REMIC-based CMO structure.

• Planned amortization (PACs) classes are designed to produce more stable cash flows by redirecting prepayments from the underlying securities to other classes called support tranches.

• Targeted amortization (TACs) classes are similar to PACs, but offer investors both call and extension protection.

• Companion (Support) classes have the most volatile cash flow behavior. • Accrual (Z) class investors receive no cash flow from the security until ce

rtain other classes are paid off. • Interest Only & Principal Only (IO/PO) classes• Floating-Rate and Inverse Floating-Rate classes are structured so that the

coupon rate payable to the investor adjusts periodically (usually monthly) by adding a certain amount (spread) to a benchmark index.

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Option Approximate Prepayment

Adjusted Yield Sensitivity

Duration

Mortgage Pass-Throughs:

GNMA, FNMA, FHLMC

Asset-Backed's: Cards, Cars Very Very

Home-Equity Loans Low Good

Adjustable-Rate Mortgages Very

ARMs and CMO Floaters Good

CMO's -- PAC's and

Sequential's

CMO --

Support Classes

Interest-Only

Strips (IO)

Principal-Only

Strips (PO)

Inverse Floaters and

Inverse IO's

Mortgage-Backed Securities Characteristics

Bond Type Liquidity

1.0 to 7.0 6.5% - 8.0% Low Excellent

0.0 to 5.0 6.0% - 7.5%

0.0 to 4.0 6.0% - 7.5% Low

1.0 to 12.0 6.0% - 8.0% Low Good

1.0 to 12.0 7.0% - 9.0% Medium Average

-40.0 to 1.0 7.5% - 20% High Average

2.0 to 45 4.0% - 12.0% High Average

-10 to 30 5.0% - 50% High Poor

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Prevailing MBS Arbitrage Strategies

• The primary methodology for valuing mortgage-backed securities is known as Option Adjusted Spread (OAS) analysis. This quantitative technique, coupled with market expertise, enables MBS managers to value fixed income securities with complex embedded options. The application of OAS, which is an implied spread over the risk-less rate for U.S. Treasuries, allows for direct comparison of securities with and without embedded prepayment or call features.

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Option-adjusted spread methodology

pS

CF

r oas

ts

si

i

tts

S

0

1

1

360

1

1

1

( )

Advantages of Option-Adjusted Spread Analysis

• OAS analysis gives investors a way to place values on the options inherent in MBSs.

• OAS methodology analyzes a security over a large number of interest rate paths, provides a summary of almost all possible scenarios, and incorporate the security’s dynamic cash flow into the analysis.

• Several studies of OAS-based trading strategies for MBSs, like Hayre and Lauterbach (1990), have shown OAS analysis performing well.

Disadvantages of Option-Adjusted Spread Analysis

• As suggested by Babbel and Zenios (1992), OAS is an average return across interest rate paths and maturity. The precision relation between OAS and the interest rate level, and between OAS and maturity are still open questions.

• Mulvey and Zenios (1994) suspect that OAS in MBSs should decline toward zero with maturity because of less prepayment activity and convergence of price to the par.

• How is OAS affected by interest rate changes?

• How does OAS vary with maturity?

Option-Adjusted Spread Calculation

1. generating interest rate paths

CIR model is applied.

2. generating cash flows

Prices and prepayment rates of MBSs of the FNMA are collected from Bloomberg.

Option-Adjusted Spread Estimates

ARMs 98.4FNCL6 3.6FNCI6 -4.8FNCX6 -13.2FNCL7 44.4FNCI7 16.8FNCX7 33.6FNCL8 100.8FNCI8 69.6FNCX8 100.8FNCL9 138FNCI9 130.8FNCX9 139.2

Interest Rate Sensitivity

• When the initial interest rate level increases, the OAS estimate for ARMs increases, while OAS estimates for other mortgages assets decrease.

• When the long-term interest rate mean increases, OAS estimates for all mortgage assets decreases.

• When the mean-reversion parameter, k, increases, OAS estimates for all mortgages assets decreases.

• When interest rate volatility increases, OAS estimates increases for all types of mortgage assets.

• A parallel sift of the term structure of interest rates has a negative effect on OAS estimates.

Investigating the Relationship between OASs and maturity

• Estimating OASs for MBSs with different maturity.

• Estimating the following model for each type of MBS:

OASt a b t log( )

OASs Vary with Maturity

TIME-VARYING OAS FOR 30-YEAR FRMS

100105110115120125130135140145

5.4 5.5 5.6 5.7 5.8 5.9

MATURITY (log(month))

OP

TIO

N-A

DJU

ST

ED

SP

RE

AD

ES

TIM

AT

ES

(b

.p.)

OASs

TREND

TIME-VARYING OAS FOR 15-YEAR FRMS

100

120

140

160

180

200

220

4.185 4.385 4.585 4.785 4.985

MATURITY (log(month))

OP

TIO

N-A

DJU

ST

ED

SP

RE

AD

ES

TIM

AT

ES

(b

.p.)

OASs

TREND

TIME-VARYING OAS FOR 7/23 BALLOONS

100105110115120125130135140145

2.995 3.195 3.395 3.595 3.795 3.995 4.195 4.395

MATURITY (log(month))

OP

TIO

N-A

DJU

STE

D

SP

RE

AD

ES

TIM

ATE

S (

b.p

.)

OASs

TREND