固定收益证券Fixed Income Securities - Lecture 10 (2013-2014).ppt

FixedIncomeSecurities-Lecture10,DrHerbertY.T.LamMay2013,TodaysLecture,MortgageLoansMortgage-BackedSecuritiesMortgagepassthroughsecuritiesCollateralizedMortgageObligationStrippedMortgage-BackedSecuritiesCMOsandSubprimeCrisis,Mortgages,Amortgageloanisaloansecuredbythecollateralofsomespecificrealestatepropertywhichobligestheborrowertomakeapredeterminedseriesofpayments.Amortgagedesignisaspecificationoftheinterestrate,termofthemortgage,andmannerinwhichtheborrowedfundsarerepaid.Mortgageoriginator(originallender)caneither-holdthemortgageintheirportfolio-sellthemortgagetoaninvestoror-usethemortgageascollateralfortheissuanceofasecurity(mortgagebackedsecurity).,Contractrate(interestrateonamortgageloan),ContractrateisgreaterthantheyieldonaTreasurysecurityofcomparablematurity.Thespreadreflectscostsofcollectioncostsassociatedwithdefault(noteliminateddespitethecollateral)poorerliquidityuncertaintyconcerningthetimingofthecashflow.,Fixedrate,levelpayment,fullyamortizedmortgage,Theborrowerpaysinterestandrepaysprincipalinequalinstallmentsoveranagreeduponperiodoftime(termofthemortgage).Thefrequencyofpaymentistypicallymonthly.Theservicingfeeisaportionofthemortgagerate.Theinterestratethattheinvestorreceivesiscalledthenetcoupon.GrowingequitymortgagesItisafixed-ratemortgagewhosemonthlymortgagepaymentsincreaseovertime.,Amortizationscheduleforalevel-paymentfixed-ratemortgage,Mortgageloan:$100,000Mortgagerate:8.125%Monthlypayment:$742.50Termofloan:30years(360months)Examplen=360,mortgagebalance=$100,000,i=0.08125/12.Mortgagepayment=$742.50.,Proofofthemortgageformula,Example,MortgagebalanceisreducedwitheachmonthlymortgagepaymentInterestportiondeclinesandrepaymentportionincreases.,AdjustableRateMortgages,ThemortgagerateisresetperiodicallyinaccordancewithsomechosenreferencerateProtectionclausesagainstoverlylargecouponchangesOthertermsRatecapslimittheamountthatthecontractratemayincreaseordecreaseattheresetdate.Alifetimecapsetsthemaximumcontractrateoverthetermoftheloan.,Prepayment,Paymentsmadeinexcessofthescheduledprincipalrepayments.Theamountandtimingofthecashflowsfromtherepaymentsarenotknownwithcertainty.ReasonsSaleofahomeMarketratesfallbelowthecontractrateFailuretomeetthemortgageobligations,Factorsaffectingprepaymentbehaviors,Prevailingmortgagerate-thecurrentlevelofmortgageratesrelativetotheborrowerscontractrate.-Thespreadshouldbewideenoughtocoverthecosts2.Pathhistoryofratespreadisimportant-dependsonwhethertherehavebeenprioropportunitiestorefinancesincetheunderlyingmortgageswereoriginated.,Factorsaffectingprepaymentbehaviors,3.Presenceofprepaymentpenalty.Macroeconomicfactorse.g.growingeconomyresultsinariseinpersonalincomeandinopportunitiesforworkermigration.Seasonalfactor:HomebuyingincreasesintheSpringandreachesapeakinthelateSummer.Sincetherearedelaysinpassingthroughprepayments,thepeakmaynotbeobserveduntilearlyFall.,Interestratepathdependence,PrepaymentburnoutPrepaymentsarepathdependentsincethismonthsprepaymentratedependsonwhethertherehavebeenprioropportunitiestorefinanceoncetheunderlyingmortgageswereoriginated.Examplepathofinterestratesinthepast3yearsFirstpath:11%8%13%8%Secondpath:11%12%13%8%Morerefinancingoccursnowwhentheinterestratesfollowthesecondpath.,Prepaymentmodels,Describestheexpectedprepaymentsontheunderlyingpoolofmortgagesattimetintermsoftheyieldcurveattimetandotherrelevantvariables.predictedfromananalysisofhistoricaldata.ExampleWeeklyreport“SpreadTalk”publishedbythePrudentialSecurities-provides6-month,1-yearandlong-termprepaymentprojectionsassumingdifferentamountsofshiftininterestrates.,Mortgage-backedsecurities(MBS),Mortgage-backedsecuritiesaresecuritiesbackedbyapoolofmortgageloans.1.Mortgagepassthroughsecurities;2.Collateralizedmortgageobligations;3.Strippedmortgage-backedsecurities.Thelasttwotypesarecalledderivativemortgage-backedsecuritiessincetheyarecreatedfromthefirsttype.,MBSversusfixedincomeinvestments,Virtuallynodefaultrisksincethemortgagesinapoolareguaranteedbyagovernmentrelatedagency,suchasGNMA(GovernmentNationalMortgageAssociation)orFNMA(FederalNationalMortgageAssociation).Prepaymentrisk/ReinvestmentriskPrepaymentprivilegesgiventothehouseholdertoputthemortgagebacktothelenderatitsfacevalue.,HowistheOption-adjusted-spread(OAS)determined?,OSAanalysisevaluatesthecashflowsforanMBSbasedonthousandsofdifferentinterestratescenarios.Startingwithcertainprepaymentassumptions,eachdifferentinterestratepathisconvertedintoaprepaymentscenario.Forexample,ifmarketratesdrop100bps,whatpercentageofborrowerswillrefinanceinagivenmonth.Avalueforthesecurityisderivedbydiscountingthetheoreticalcashflowstothepresentandaveragingthem.Numericaltechniques:latticetreetogeneratethevariousinterestratescenarios.,MortgagePassthroughSecurities,Amortgagepassthroughsecurityisasecuritycreatedwhenoneormoreholdersofmortgagesformapoolofmortgagesandsellsharesorparticipationcertificatesinthepool.Thecashflowsconsistsofmonthlymortgagepaymentsrepresentinginterest,thescheduledrepaymentofprincipal,andanyprepayments.,MortgagePassthroughSecurities,Paymentsaremadetosecurityholderseachmonth.Themonthlycashflowsforapassthrougharelessthanthemonthlycashflowsoftheunderlyingmortgagesbyanamountequaltoservicingandotherfees.Notallofthemortgagesthatareincludedinthepoolthataresecuritizedhavethesamemortgagerateandthesamematurity.Aweightedaveragecouponrate(WAC)andaweightedaveragematurity(WAM)aredetermined.,Senior/subordinatedstructures,Thesubordinatedclassisthefirst-losspieceabsorbingalllossesontheunderlyingcollateral,thusprotectingtheseniorclass.Theseniorclassisgivingupyieldtothesubordinatedclassholders.Example$100milliondealdividedinto$92.25millionseniorclass$7.75millionsubordinatedclassSupposethereis$10millionoflosses,thesubordinatedclassexperiences$7.75millionoflosses(100%loss)andtheseniorclassexperiencesalossof$2.25million(2.4%=$2.25/$92.25loss).,Contractionrisk,Supposeaninvestorbuysa10%couponGinnieMaeatatimewhenmortgagesare10%.Whatwouldbetheimpactonprepaymentsifmortgageratesdeclineto6%.Thepriceofanoptionfreebondwillrise,butinthecaseofpassthroughsecuritytheriseinpriceislessbecausethereisahigherprepayment(refinanceatlowerrate).Theupsidepricepotentialistruncatedduetoprepayments.Thecashflowsfromprepaymentsarereinvestedatalowerrate.,Expansionrisk,Whathappenifthemortgageratesriseto15%?Thepriceofthepassthrough,likethepriceofanybond,willdecline.Itdeclinesmorebecausethehigherrateswilltendtoslowdowntherateofprepayment,ineffectincreasingtheamountinvestedatthecouponrate,whichislowerthanthemarketrate.,WhatisaCollateralizedmortgageobligations(CMO)?,MortgagesarepooledThepoolissplitintovarioustrancheswithvaryingdegreesofrisk,cashflows,andtimeframes.“tranche”Frenchwordmeaning“slice”InvestorspurchasesecuritiesMortgagesareusedascollateralformortgagepass-throughsecurities,Collateralizedmortgageobligations(CMO),Acollateralizedmortgageobligationisadebtinstrumentcollateralizedbymortgagepassthroughcertificates.Thecashflows(interestandprincipal)aredirectedtodifferentbondclasses,calledtranchessoastomitigatedifferentformsofprepaymentrisk.Thisisknownas“distributionbasedonthewaterfall”.,Collateralizedmortgageobligations(CMO),HistoryofCMOs,Originatedasamortgagepass-throughsecurityGovernment-sponsoredenterpriseswerecreatedtoattractinvestorsthentrancheBbeginstoreceiveprincipalandcontinuestodosountilitispaidtheentire$36,000,000.Eachtranchereceiveinterestontherespectiveclasssoutstandingbalance,Sequential-paytranches,TranchesmatureinchronologicalorderTranche1receivesprincipalandinterestpaymentswhileTranche2L=3,Floating-RateTranches,Fordisbursementofprincipalpayments:DisburseprincipalpaymentstotrancheAuntilitispaidoffcompletely.AftertrancheAispaidoffcompletely,disburseprincipalpaymentstotrancheBuntilitispaidoffcompletely.AftertrancheBispaidoffcompletely,disburseprincipalpaymentstotranchesFLandIFLuntiltheyarepaidoffcompletely.TheprincipalpaymentsbetweentranchesFLandIFLshouldbemadeinthefollowingway:75%totrancheFLand25%totrancheIFL.AftertranchesFLandIFLarepaidoffcompletely,disburseprincipalpaymentstotrancheZuntiltheoriginalprincipalbalanceplusaccruedinterestispaidoffcompletely.,Floating-RateTranches,Forpaymentofperiodiccouponinterest:DisburseperiodiccouponinteresttotranchesA,B,FL,andIFLonthebasisoftheamountofprincipaloutstandingatthebeginningoftheperiod.FortrancheZ,accruetheinterestbasedontheprincipalplusaccruedinterestintheprecedingperiod.TheinterestfortrancheZistobepaidtotheearliertranchesasaprincipalpaydown.ThereisacaponFLandaflooronIFL.ThemaximumcouponrateforFLis10%;theminimumcouponrateforIFLis0%.Thefactor3inIFLiscalledthecouponleverage.,StructuredInterest-OnlyTranches,Theyarecreatedbyalteringthedistributionofprincipalandinterestfromaproratadistributiontoanunequaldistribution.Forexample,alltheinterestisallocatedtotheIOclass(interestonly)andalltheprincipaltothePOclass(principalonly).POsecuritiesarepurchasedatasubstantialdiscountfromparvalue.Thefastertheprepayments,thehighertheyieldtheinvestorwillrealize.IOinvestorswantprepaymentstobeslow.Thisisbecausewhenprepaymentsaremade,theoutstandingprincipaldeclines,andlessdollarinterestisreceived.,StructuredInterest-OnlyTranches,FiveTrancheSequentialPaywithanAccrualTrancheandanInterest-OnlyTrancheFortheIOclass,thereisnoparamount.Theamountshownistheamountonwhichtheinterestpaymentswillbedetermined.Thisiscalledthenotionalamount.Notionalamountfor7.5%IO,StructuredInterest-OnlyTranches,CreatingaNotionalIOTranche,PaymentRules-Interest-only,Forpaymentofperiodiccouponinterest:DisburseperiodiccouponinteresttotranchesA,B,andConthebasisoftheamountofprincipaloutstandingatthebeginningoftheperiod.FortrancheZ,accruetheinterestbasedontheprincipalplusaccruedinterestintheprecedingperiod.TheinterestfortrancheZistobepaidtotheearliertranchesasaprincipalpaydown.DisburseperiodicinteresttotheIOtranchebasedonthenotionalamountatthebeginningoftheperiod.,PaymentRules-Interest-only,Fordisbursementofprincipalpayments:DisburseprincipalpaymentstotrancheAuntilitispaidoffcompletely.AftertrancheAispaidoffcompletely,disburseprincipalpaymentstotrancheBuntilitispaidoffcompletely.AftertrancheBispaidoffcompletely,disburseprincipalpaymentstotrancheCuntilitispaidoffcompletely.AftertrancheCispaidoffcompletely,disburseprincipalpaymentstotrancheZuntiltheoriginalprincipalbalanceplusaccruedinterestispaidoffcompletely.,PlannedAmortizationClass(PAC),MostpopularCMOissuedtodayMakeup50%ofallfirsttimeissuedCMOsMitigateprepaymentriskPrepaymentspeedsetsataspecifiedband(collar)Supporttranchesabsorbtheprepaymentrisk,PlannedAmortizationClass(PAC),CreatesascheduleoffixedprincipalpaymentsIfprepaymentoccurs,investorreceivesfixedpaymentwhileadditionalfundsareappliedtoacompanion/supporttranche(reduceprepaymentrisk)GuaranteecashflowatgivenintervalsProtectedagainstContraction&ExtensionRiskMinimalRisk=LowerRates,PSAPrepaymentBenchmark(100PSA),100PSA-startingwithanannualizedprepaymentrateof0%inmonth0,theratewillincreaseby0.2%eachmonth,untilitpeaksat6%after30months,thenconstantannualprepaymentrateof6%,125PSA,175PSA,200PSA,TargetedAmortizationClass(TAC),SimilartoPlannedAmortizationClassOfferedatafixedrateversusafixedpaymentMinimalRiskExcesscashflowisdistributedtocompaniontrancheCompaniontranchesofferhigherratesNotellinghowfastorslowthetranchewillmature,StrippedMortgage-BackedSecurities(SMBS)本息分离组MBS,SMBSarecreatedbyseparating(“stripping”)theinterestandprincipalpaymentsinapass-throughcashflowandthenallocatingspecifiedpercentagesofthesepaymentstoseparateclasses.IO-onlyreceives100%oftheinterestcash-flowsfromtheunderlyingpass-throughsand0%oftheprincipal.PO-onlyreceivesbothscheduledandunscheduledpaymentsofprincipalandnoneoftheinterest.,StrippedMortgage-BackedSecurities,StrippedMortgage-BackedSecurities,Principal-OnlyMortgageStripsReceivesonlyprincipalpaymentsBoughtatdiscountVulnerabletoInterestRateChangesDecreaseininterestratescreateanincreaseinprepaymentThefastertheprepayments,thehighertheinvestorsreturn,StrippedMortgage-BackedSecurities,Interest-OnlyMortgageStripsNoparvalueReceivesonlyinterestpayments“interestlivesontheprincipal”VulnerabletoInterestRateChangesIncreaseininterestratescreateadecreaseinprepaymentIOwantsprepaymentstobeslow,100PSA,300PSA,RelationshipbetweenpriceandmortgageratesforaPassthrough,POandIO,MortgageRateContractRate(9%)PrepaymentCashflowdiscountedatalowerratePOprice,9%,Impactofmortgagerates,IOinstrippedmortgagebacksecuritiesThevalueincreasesmonotonicallywithrateincreasesinceinterestpaymentsincrease.POinstrippedmortgagebackedsecuritiesThevaluedecreasesmonotonicallywithrateincreasesincefuturecashflowstobereceivedhaslesspresentvalue.,WhyIOorPOcashflowsmightbeofinteresttoinvestors?,PricingandhedgingprepaymentriskIO(negativeduration),hedgeforincreasingratesPO,hedgeforprepaymentrisk,i.e.bymortgageservicers,WhyIOorPOcashflowsmightbeofinteresttoinvestors?,WhyCMOarepopular?,TheCMOconvertsalong-termmonthlypaymentinstrumentintoaseriesofsemi-annualpayments,whicharebond-likesecuritieswithshort,intermediateandlongmaturities.Themultiple-maturitystructurereducesthedegreeofuncertaintyofcashflowsforanyparticularmaturityclass,andprovidesthelongermaturityclasseswithlimitedcallprotection.Thisisbecauseshortertranchesabsorbtheinitialburdenofexcessprincipalrepayments.,WhyCMOarepopular?,3.InvestorsareattractedbythebroaderrangeofinvestmentmaturitiesmadepossiblebytheCMOstructure.Forexample,insurancecompaniespurchaseheavilyinthe4-6yearlifetranche.Pensionfundshavebeenactiveinthelongertranchesector.4.CreditqualityThehighqualityofthecollateral(GNMAetc.)alongwiththeprotectivestructureofthetrust,enablesthesesecuritiestogenerallycarrythehighestinvestmentgradecreditrating.YieldOfferinvestorsattractiveyieldpremiumsoverTreasuryandevensomecorporatebonds.6.EventriskCMOareessentiallyfreefromdefaultrisk.Theyarealsofreefromeventsthatcausepricefluctuationsinthecorporateworld.,Valuationofthetranches,CMOistheunbundlingoftraditionalmortgage-backedsecuritiesintoshorttranchecashflowsandlongtranchecashflows.Themarketyieldofabundledbondistheweightedaverageoftheyieldsforthetwotranches.Steeperyieldcurves(widerspreadbetweenthelong-termandshort-terminterestrates)andgreaterprepaymentriskenhancethevalueoftheCMOsecurityrelativetothecomparableGNMA(GovernmentNationalMortgageAssociation)pass-through.Each100basispointsincreaseinthesteepnessoftheyieldcurveisfoundtoprovide14basispointsincreaseinCMOsweightedyield,ValuingMBSusingMonteCarlosimulation,Generaterandominterestratepathsbytakingasinputtodaystermstructureofinterestratesandavolatilityassumption.Prepaymentsareprojectedbyfeedingtherefinancingrateandloancharacteristicsintoaprepaymentmodel.Giventheprojectedprepayments,thecashflowalonganinterestratepathcanbedetermined.Thesimulationworksbygeneratingmanyscenariosoffutureinterestratepaths.AnestimateofthevalueoftheMBSistheaverageofthesamplevaluesovermanysimulationtrials.,SecuritizationMarketActivity,HowhaveCMOscontributedtothecurrenteconomicmeltdown?,SubprimeLendingBorrowerswhodonotqualifyforprimeloansPredatoryLendingTargetsindividualswithalimitedunderstandingoffinancialtransactionsOfferssubprimeloanstoindividualswhoqualifyforprimeloans,ConflictsofInterestLackoftrainingorlicensingformortgagebrokersBrokerspaidbyboththeborrowersandloanoriginatorsSomebrokersreceivedayield-spreadpremiumforchargingahigherinterestratethantheborrowerqualifiedforCompaniesratingCMOsPaidbycompanyofferingsecurity,notbuyersofsecuritiesChastisedbySECFailedtoprotectinvestorsInadequatestaffingNottrackingperformanceaftergivinginitialrating,HowhaveCMOscontributedtothecurrenteconomicmeltdown?,FraudFraudforProfitCollusionbetweenindustryinsidersFraudforPropertyMaterialmisrepresentationonloanapplicationLackofethicalbehaviorintheoriginationofmortgagesledtohighe