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

CHAPTER 8

Structuring Private-Label CMOs

The private-label CMO market has traditionally encompassed a variety of product and structuring variations. Technically, any deal that is not securitized under an agency or GSE shelf (i.e., Ginnie Mae, Freddie Mac, or Fannie Mae) can be considered private label, as the issuing entity has no connection to the U.S. government (either explicit or implicit). Such deals must have some form of credit enhancement in order to create large amounts of investment-grade bonds. The convention in the markets, however, has been to divide nonagency MBS into two sectors. In this scheme, the private-label sector is defined as the securitization of prime, first-lien fixed and adjustable rate loans. Other products, such as deals backed by subprime and second-lien loans, are classified as mortgage-related asset-backed securities or mortgage ABS, a subset of the ABS category.

In some ways, this classification scheme is fairly arbitrary. Mortgage credit evolved over time from discrete sectors to a continuum. As the dividing lines between prime, alt-A, and subprime loans blurred, the structuring form became the primary factor distinguishing the different sectors. For example, if one type of structure offered superior execution for a loan, chances are good that it would be securitized using such a structure, irrespective of the classification of the loan. Thus, the two sectors are distinguishable as much by their structural forms as their collateral classification. ...