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

CASH FLOW STRUCTURING

As noted previously, the cash flows generated by agency pools and senior private label pass-throughs are very similar in nature. Both securities can be structured to take advantage of demand for a variety of securities by different segments of the fixed income investment community. Various investor clienteles have different investment objectives and risk tolerances, and thus tend to invest in securities with different cash flow and performance attributes. Some different market segments include:

• Banks and other depository institutions, which generally seek short securities where they can earn a spread over their funding costs.

• Life insurance companies and pension funds, which typically invest in bonds with longer maturities and durations in order to immunize longdated expected liabilities.

• Investment managers, who typically manage fixed income assets versus performance indexes.

• Hedge funds, which typically seek investment vehicles that offer the potential for very high-leveraged returns.

The nature of mortgage cash flows makes mortgage loans and mortgage-backed securities ideal vehicles for creating a variety of bonds. Their long-term principal and interest cash flows allow structurers to create securities of varying average lives and durations in order to meet the needs of different classes of investors. In addition, different structures allow different risks (both prepayment and, for private label deals, credit) to be transferred within the ...