The Handbook of Financial Instruments

Chapter 15 Nonagency MBS and Real Estate-Backed ABS

Frank J. Fabozzi, Ph.D., CFA

Adjunct Professor of Finance School of Management Yale University

John Dunlevy, CFA

Senior Portfolio Manager Beacon Hill Asset Management

In Chapter 14, mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac are described. In this chapter, we will look at products backed by residential mortgages that are not issued by one of these entities. These products fall into two groups: nonagency MBS and asset-backed securities backed by residential mortgage loans (i.e., real estate-backed ABS).

The classification of a security as either a nonagency MBS or a real estate-backed ABS is not always clear. This is because there are securities in which the underlying collateral is mixed with various types of mortgage-related loans. That is, the collateral backing a deal may include collateral that is a combination of standard first-lien residential mortgages, second lien mortgages, as well as other products that we will describe in this chapter—home equity loans and manufactured housing loans.¹ The Secrities Data Corporation (SDC) has established criteria for classifying a mortgage product with mixed collateral as either a nonagency MBS or an ABS. The classification rule is as follows: If at issuance more than 50% of a deal consists of either manufactured housing loans, home equity loans, second mortgage loans, or home improvement loans, then the deal is classified as an ABS. For deals in ...