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Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition
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Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition

by Frank J. Fabozzi, Anand K. Bhattacharya, William S. Berliner
September 2011
Intermediate to advanced content levelIntermediate to advanced
352 pages
9h 45m
English
Wiley
Content preview from Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition

CHAPTER 6

Fundamental MBS Structuring Techniques

Divisions of Principal

Directing principal cash flows to different tranches within a deal is a primary method of creating bonds to meet the varying needs of different investor classes. Viewing a collateralized mortgage obligation (CMO) deal as a cash flow allocation mechanism, as described in the previous chapter, means that the allocation of principal is accomplished by the creation of one or more sets of payment rules. The rules specify how cash flows are allocated for each month's payments and will vary depending on what type of bond is being created. For example, the pay rules may state that a bond in the structure receives all principal paid by the collateral until the bond is fully paid; at that point, principal is directed to a different tranche. In this and the following chapter, we describe fundamental structuring techniques used in agency CMO deals, in which no credit enhancement is necessary due to the agency guaranty at the pool level. In both chapters, payment rules are shown for each structuring example, in order to demonstrate how different structuring techniques allocate principal and interest cash flows.

It is important to remember that a CMO deal represents a “closed universe” of principal. A deal with a principal face value of $400 million means that the total amount of principal available to be paid is $400 million—not a penny more. At faster prepayment speeds, for example, principal cash flows are paid to the ...

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Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques

Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques

FRANK J. FABOZZI, ANAND K. BHATTACHARYA, WILLIAM S. BERLINER

Publisher Resources

ISBN: 9781118004692Purchase book