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

CHAPTER 8

Structuring Private Label CMOs

The private label CMO market encompasses 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, is to limit the private label sector to 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, a subset of the ABS category.

In some sense, this classification scheme has become fairly arbitrary. Mortgage credit has evolved over time from discrete sectors to a continuum. As the dividing line between the alt-A and subprime sectors blur, the structuring form has become the primary factor distinguishing the two sectors. For example, if one type of structure offers superior execution for a loan, chances are good that it will 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. For the purposes of this book, private label deals will be those using the fairly straightforward ...