Mortgage backed securitites

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Presentation transcript:

Mortgage backed securitites András Bohák

MBS I. Mortgage-backed securities Agency or non-agency Fix or adjustable interest (ARM – adjustable rate mortgage) Balloon Pass-through or structured

MBS II. MBS 30 Year Gold PC cusip 3128KDM28 Freddie Mac Loan Originator / Servicer Loan Loan Loan Originator / Servicer Securitizer MBS Loan Loan 30 Year Gold PC cusip 3128KDM28 Loan Originator / Servicer Loan Freddie Mac Bank of America Source: Miklós Vörös, 2011.

Prepayment In the US, partial or full prepayment is possible and free. This is more and more true in the EU. Main prepayment reasons: Selling the property („turnover”) Falling rates („refinancing”) And in some cases, default too Because of insurance, a default looks like a prepayment to the investor

MBS III. Pass-throughs are the easiest, it is only about diversification RMBS: residential CMBS: commercial Sturctured: collateralized mortgage obligation (CMO) Details later

Huge market (over 5 trillion USD) MBS IV. SMBS: Stripped MBS IO – Interest only PO – Principal Question: How does the value of these react to changes in prepayment? If prepayment increases, PO ↑ and IO ↓ ↓ Huge market (over 5 trillion USD)

Fannie Mae, Freddie Mac Fannie Mae, Freddie Mac Fannie was founded in 1938 as part of the New Deal Privatized in 1968 Goal: provide liquidity to the market by securitization Buy fresh loans from originators Sell it to investors Add guarantee for a fee Government-sponsored Enterprise Freddie: from 1970, against monopoly Ginnie Mae is the third, it was always public Full faith and credit of the US

Case-Shiller index USA real estate index Since 1987 RSR – repeated sales regression Indexing in an illiquid market is hard. With RSR, only double sales enter the index. Monthly data, now run by S&P. It has a two month delay.

HPI index as of today

CMO Risks of loans Interest rate risk Prepayment risk Reinvestment risk Esetleg default risk The aim of a CMO is to redistribute this risks among investors BEWARE: total risk remains the same, we can just split it differently

Overview

Everything is AAA?