Encyclopedia of Financial Models III

Analysis of Nonagency Mortgage-Backed Securities

WILLIAM S. BERLINER

Executive Vice President, Manhattan Advisory Services Inc.

FRANK J. FABOZZI, PhD, CFA, CPA

Professor of Finance, EDHEC Business School

ANAND K. BHATTACHARYA, PhD

Professor of Finance Practice, Department of Finance,W. P. Carey School of Business, Arizona State University

Abstract: The transformation of groups of mortgage loans with common attributes into tradable and liquid MBS occurs using one of two mechanisms. Loans that meet the guidelines of the agencies (i.e., Fannie Mae, Freddie Mac, and Ginnie Mae) in terms of credit quality, underwriting standards, and balance are assigned an insurance premium (called a guaranty fee) by the agency in question and securitized as an agency pool. Loans that either do not qualify for agency treatment, or for which agency pooling execution is not efficient, can be securitized in nonagency or “private-label” transactions when such transactions are economically feasible. These types of securities do not have an agency guaranty, and must therefore be issued under the registration entity or “shelf” of the issuer. Although the analysis of private-label mortgage-backed securities utilizes many of the techniques employed to assess agency securities, the analysis must be extended in order to incorporate credit risk and adjust returns for expected principal losses, requiring additional analysis and metrics.

While the evaluation of private-label mortgage-backed securities (MBS) ...