Private-label mortgage pass-throughs (hereafter, private-label pass-throughs) began to play a significant role in housing finance in the beginning of the 2000s. They are called private-label because neither the underlying mortgages nor the securities themselves are insured or guaranteed by a government agency. For this reason, private-label pass-through transactions are necessarily structured with credit enhancement and always issued in multiple securities with a wide range of credit classes.
This chapter will first present the development of the private-label pass-through market. It will then describe the structure of private-label pass-throughs with an example of a typical transaction. The description will consist of: (1) analysis of the characteristics of the underlying mortgages, and (2) illustration of the credit-enhancement mechanism of the typical transaction. This chapter will also explain the unique prepayment pattern, discuss the criteria of credit ratings, examine the historical performance of credit ratings, and present the trading and relative value of private-label pass-throughs. Two appendixes are provided at the end of the book: Appendix B discusses housing price appreciation and mortgage credit performance, and Appendix C the fundamental elements in credit ratings.
The Growth of the Private-Label Pass-Through Market
As briefly described in Chapter 6, although private-label pass-throughs made their market debut in 1977, ...