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Securitization: Structuring and Investment Analysis

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''This book fills a very important gap in the mindset of the bond structurer and the investor. Often, the two disciplines approach their tasks ignorant of the perspectives of the other side. But successful structuring requires providing the best value to investors in order to compete, and investors who don’t fully understand structuring will not remain investors for long. Highly recommended!'' –Bennett W. Golub Managing Director, BlackRock, Inc.

''An excellent primer on asset securitization, clearly written in plain English and with straightforward mathematical expressions. This book is suitable for both business school students and structured finance market practitioners.'' –Joseph Hu, PhD Managing Director, Structured Finance Ratings Standard & Poor’s

''In their new work Securitization: Structuring and Investment Analysis, Andrew Davidson et al. reinforce their preeminence in the alchemy of mortgage securitization. Anyone involved in mortgages neglects Andy’s work at his peril.'' –Richard T. Pratt Chairman, Richard T. Pratt Associates Former Chairman, Merrill Lynch Mortgage Corporation

''This book provides an insightful and accessible exploration of securitized real estate markets. As such, it provides a valuable service to those active and interested in these burgeoning markets. The authors have done a wonderful job of gracefully integrating a vast and important subject matter. Accordingly, this book also makes for an excellent textbook for those universities offering one or more courses in this rapidly growing field.'' –Joseph L. Pagliari, Jr. Kellogg School of Management Northwestern University

Author(s): Andrew Davidson, Anthony Sanders, Lan-Ling Wolff, Anne Ching
Series: Wiley Finance
Publisher: Wiley
Year: 2003

Language: English
Pages: 578

Securitization......Page 4
Acknowledgments......Page 8
Preface......Page 10
Contents......Page 14
PART ONE Introduction to Securitization......Page 22
CHAPTER 1 The Role of Securitization......Page 24
Summary of Major Asset Classes......Page 25
Key Concepts......Page 28
Key Players in Securitization......Page 30
Key Investment Characteristics of Securities (Bonds)......Page 32
Exercises......Page 33
Issuer’s Motivations: Legal, Accounting, and Tax Considerations......Page 36
Issues in Balance-Sheet Analysis......Page 39
Issuing Vehicles......Page 41
Exercises......Page 48
CHAPTER 3 Fundamentals of Investment Analysis......Page 50
Types of Investors......Page 53
Analyzing Securities......Page 56
Exercises......Page 61
Comparing Returns on Alternative Asset-Backed Securities and Mortgage-Backed Securities Investments......Page 62
A Case Study of Market Turbulence......Page 64
Performance of Mortgage-Backed Securities and Asset-Backed Securities......Page 66
Exercises......Page 68
PART TWO Agency Mortgage-Backed Securities......Page 70
What Is a Mortgage?......Page 72
How Large Is the Mortgage Market?......Page 74
Types of Mortgages......Page 75
Adjustable-Rate Mortgages......Page 83
Graduated-Payment Mortgages......Page 86
Shared-Appreciation Mortgages......Page 87
Reverse-Annuity Mortgage......Page 88
Mortgage Default and Legal Issues Concerning Mortgages......Page 89
The Federal National Mortgage Association/Federal Home Loan Mortgage Corporation Uniform Loan Contract......Page 94
Exercises......Page 95
The Role of Government Agencies and Government-Sponsored Enterprises......Page 96
Brief History of the Agency Market......Page 97
Key Terms for Agency Pass-Throughs......Page 101
Agency Programs......Page 103
Trading of Agency Mortgage-Backed Securities......Page 105
Exercises......Page 108
Bond Prices and Interest Rates......Page 110
Forward Rates and Risk Neutrality......Page 119
Completing the Curve......Page 125
Exercises......Page 128
Methodology......Page 130
Collateral......Page 131
Structure......Page 135
Results......Page 141
Exercises......Page 148
CHAPTER 9 Mortgage-Backed Securities Prepayments......Page 152
Sources of Prepayments......Page 153
Prepayment Data......Page 154
Analyzing Prepayments......Page 157
Prepayment Models......Page 165
Exercises......Page 173
CHAPTER 10 Total-Return Scenario Analysis......Page 176
Methodology......Page 177
Collateral......Page 185
Structure......Page 187
Results......Page 190
Exercises......Page 199
PART THREE Advanced Mortgage-Backed Securities and Analysis......Page 204
CHAPTER 11 Structuring CMOs, IOs, and POs......Page 206
Collateralized-Mortgage Obligations as Rules......Page 208
Sequential Bonds......Page 217
Pro Rata Bonds......Page 219
Scheduled Bonds......Page 221
Sequential PACs and Other Combinations......Page 226
Interest Only and Principal Only......Page 227
Senior/Subordinated Structures......Page 229
Exercises......Page 230
The Concept and Measures of Volatility......Page 236
Valuation in Stochastic Arbitrage-Free World......Page 245
Valuation of Options and Embedded-Option Bonds......Page 249
Term-Structure Models......Page 262
Exercises......Page 268
Methodology......Page 270
Collateral......Page 282
Structure......Page 284
Results......Page 285
Exercises......Page 289
Mortgage-Backed Securities......Page 296
Interest Only and Principal Only Securities......Page 298
Collateralized-Mortgage Obligations......Page 300
Exercises......Page 304
PART FOUR Non-Agency Mortgage-Backed Securities and Analyzing Credit Risk......Page 306
Historical Overview of the Non-Agency/Private-Label Market......Page 308
Private-Label Mortgage-Backed Securities Collateral Types......Page 309
Credit Enhancement......Page 310
Exercises......Page 322
Modeling Collateral Cash Flows......Page 324
Exercises......Page 344
Home Equity Loan Asset-Backed Securities Issuance......Page 346
Prepayment......Page 351
Home Equity Loan Asset-Backed Securities......Page 352
Exercises......Page 356
CHAPTER 18 Analysis of Credit-Sensitive Mortgage-Backed Securities......Page 358
Methodology......Page 359
Collateral......Page 360
Structure......Page 363
Results......Page 367
Exercises......Page 373
PART FIVE Asset-Backed Securities......Page 374
Collateral and Loan Characteristics......Page 376
Environment......Page 378
Valuation......Page 385
Exercises......Page 386
Credit-Card Asset-Backed Securities Issuance......Page 388
Credit-Card Asset-Backed Securities Structures......Page 390
Rating Agency Criteria......Page 394
Exercises......Page 398
Manufactured-Housing Asset-Backed Securities Issuance......Page 400
Collateral and Loan Features......Page 403
Manufactured-Housing Asset-Backed Securities Structures......Page 404
Prepayments......Page 405
Rating Agency Criteria......Page 407
Exercises......Page 409
PART SIX Commercial Mortgages......Page 410
Types of Income-Producing Properties......Page 412
General Risk Evaluation......Page 413
Leases......Page 418
Valuing Income-Producing Properties......Page 419
Impact of Financial Leverage......Page 421
Exercises......Page 429
Commercial Mortgage-Backed Securities: An Overview......Page 430
The Underlying Loan Portfolio......Page 438
Role of the Servicer......Page 445
The Future of Commercial Mortgage-Backed Securities......Page 446
Exercises......Page 447
Background......Page 450
Types of Real Estate Investment Trusts......Page 451
Real Estate Investment Trust Structures......Page 452
Property Types......Page 453
A Bit of History......Page 455
Real Estate Investment Trust Initial Public Offerings......Page 457
International Real Estate Return Performance......Page 458
Real Estate Investment Trust Valuation......Page 460
Other Factors Influencing Real Estate Investment Trust Valuation and Performance......Page 463
Exercises......Page 464
PART SEVEN The European Securitization Market......Page 466
CHAPTER 25 Development of a Market......Page 468
Size of Market......Page 470
Type of Assets......Page 474
Securitization Outside Europe and the United States......Page 481
Exercises......Page 485
CHAPTER 26 European Residential Mortgages......Page 486
Property Value Loss and Default Risk......Page 490
Legal and Tax Issues for Residential Mortgages......Page 492
Mortgage Collateral Characteristics......Page 497
Principal Payment Rules......Page 499
Interest Payment Rules......Page 503
Prepayments and Other Risks......Page 505
Exercises......Page 508
Type of Law......Page 510
Securing the Asset......Page 512
Exercises......Page 523
The European Approach......Page 524
Assessing the Collateral......Page 525
Issues in Bond Structuring......Page 535
Legal Process and Counterparties......Page 541
Timing and Costs......Page 545
Exercises......Page 546
Bibliography......Page 548
Additional Resources......Page 552
Index......Page 558