CHAPTER 8
Cash Flow for Mortgage-Backed Securities and Amortizing Asset-Backed Securities
A major sector of the fixed income market is the mortgage-backed securities market. Mortgage-backed securities are securities backed by a pool of mortgage loans. The pool of loans is referred to as the collateral. Loans that are included in the pool are said to have been securitized. While residential mortgage loans are by far the largest type of asset that has been securitized, other assets (consumer and business loans and receivables) have been securitized. The largest sectors of the asset-backed securities market in the United States are securities backed by credit card receivables, auto loans, home equity loans, manufactured housing loans, student loans, Small Business Administration loans, and collateralized bond obligations. Since home equity loans and manufactured housing loans are backed by real estate property, the securities backed by them are referred to as real estate-backed asset-backed securities. Other asset-backed securities include securities backed by home improvement loans, health care receivables, agricultural equipment loans, equipment leases, commercial mortgage loans, music royalty receivables, movie royalty receivables, and municipal parking ticket receivables. The list is continually expanding.
In this chapter, we demonstrate how to compute the cash flow of mortgage-backed and amortizing asset-backed securities. We also show how certain types of products are created ...