Securitization

ANDREW DAVIDSON, one of the most well-respected names in mortgage-backed securities and securitization, is President and founder of Andrew Davidson & Co., Inc., a New York—based consulting firm specializing in the application of analytical tools to investment management. The company provides consulting advice to many of the major firms in the securitization business. It is also a leading provider of prepayment and valuation models for MBS and ABS. Prior to forming the company in 1992, Davidson was a managing director at Merrill Lynch responsible for MBS, CMO, ABS, and Futures and Options Research. ANTHONY SANDERS is the Galbreath Distinguished Scholar and Professor of Finance at The Ohio State University. During 1997 and 1998, he was director and head of asset-backed and mortgage-backed securities research at Deutsche Bank. He has published numerous articles in journals such as the Journal of Finance, Journal of Financial and Quantitative Analysis, Journal of Business, and Journal of Fixed Income.LAN-LING WOLFF heads Fredell & Co. Structured Finance Ltd. in London, which specializes in providing structuring and arranging services for asset-backed securities all over Europe. Wolff’s background in the U.S. mortgage-backed securities market and understanding of the European capital markets places her on the cutting edge of securitization globally. She specializes in residential mortgages and mortgage banking.ANNE CHING, a senior consultant at Andrew Davidson & Co., Inc., has worked in the credit risk and investment analysis of sub-prime residential and manufactured housing sectors. She has also worked on the structuring of non-U.S. mortgage-backed securities.The authors drew on the expertise of Andrew Davidson & Co., Inc., in preparing Securitization. The broad range of expertise of the firm’s consultants, and the technical and analytical skills of the firm’s analysts, provide a rich background that gives Securitization strong theoretical underpinnings, as well as a grounding in practical application of the theory and methods described in the book. Two associates from outside the firm, with additional specialized expertise, were enlisted as well.

• Part One Introduction to SecuritizationChapter 1 The Role of Securitization 3Summary of Major Asset Classes 4Key Concepts 7Key Players in Securitization 9Key Investment Characteristics of Securities (Bonds) 11Exercises 12Chapter 2 Fundamentals of Structuring 15Issuer’s Motivations: Legal, Accounting, and Tax Considerations 15Issues in Balance-Sheet Analysis 18The Structuring Process 20Issuing Vehicles 20Exercises 27Chapter 3 Fundamentals of Investment Analysis 29Types of Investors 32Analyzing Securities 35Exercises 40Chapter 4 Historical Performance of Asset-Backed Securities and Mortgage-Backed Securities 41Comparing Returns on Alternative Asset-Backed Securities and Mortgage-Backed Securities Investments 41A Case Study of Market Turbulence 43Performance of Mortgage-Backed Securities and Asset-Backed Securities 45Exercises 47Part Two Agency Mortgage-Backed SecuritiesChapter 5 Mortgage Loans: The Basis of Mortgage-Backed Securities 51What Is a Mortgage? 51How Large Is the Mortgage Market? 53Types of Mortgages 54Adjustable-Rate Mortgages 62Graduated-Payment Mortgages 65Shared-Appreciation Mortgages 66Reverse-Annuity Mortgage 67Mortgage Default and Legal Issues Concerning Mortgages 68The Federal National Mortgage Association/Federal Home Loan Mortgage Corporation Uniform Loan Contract 73Exercises 74Chapter 6 Agency Pass-Throughs 75The Role of Government Agencies and Government-Sponsored Enterprises 75Brief History of the Agency Market 76Key Terms for Agency Pass-Throughs 80Mechanics of the Pool Programs 82Agency Programs 82Trading of Agency Mortgage-Backed Securities 84Exercises 87Chapter 7 Fundamentals of the Interest-Rate Market 89Bond Prices and Interest Rates 89Forward Rates and Risk Neutrality 98Completing the Curve 104Exercises 107Chapter 8 Static Analysis for Mortgage Pass-Through Securities 109Methodology 109Collateral 110Structure 114Results 120Exercises 127Chapter 9 Mortgage-Backed Securities Prepayments 131Sources of Prepayments 132Prepayment Data 133Analyzing Prepayments 136Prepayment Models 144Exercises 152Chapter 10 Total-Return Scenario Analysis 155Methodology 156Collateral 164Structure 166Results 169Exercises 178Part Three Advanced Mortgage-Backed Securities and AnalysisChapter 11 Structuring CMOs, IOs, and POs 185Collateralized-Mortgage Obligations as Rules 187Principal-Pay Types 196Interest-Pay Types 196Sequential Bonds 196Pro Rata Bonds 198Scheduled Bonds 200Sequential PACs and Other Combinations 205Interest Only and Principal Only 206Senior/Subordinated Structures 208Exercises 209Chapter 12 Interest-Rate Volatility, Options, and Models 215The Concept and Measures of Volatility 215Valuation in Stochastic Arbitrage-Free World 224Valuation of Options and Embedded-Option Bonds 228Term-Structure Models 241Exercises 247Chapter 13 Option-Adjusted Spread 249Methodology 249Collateral 261Structure 263Results 264Exercises 268Chapter 14 Comparing Investment Alternatives 275Mortgage-Backed Securities 275Interest Only and Principal Only Securities 277Collateralized-Mortgage Obligations 279Exercises 283Part Four Non-Agency Mortgage-Backed Securities and Analyzing Credit RiskChapter 15 Non-Agency Mortgage-Backed Securities 287Historical Overview of the Non-Agency/Private-Label Market 287Private-Label Mortgage-Backed Securities Collateral Types 288Credit Enhancement 289Exercises 301Chapter 16 Collateral Performance 303Collateral Cash Flows 303Modeling Collateral Cash Flows 303Exercises 323Chapter 17 Home Equity and Subprime Loans 325Home Equity Loan Asset-Backed Securities Issuance 325Environment 330Prepayment 330Home Equity Loan Asset-Backed Securities 331Exercises 335Chapter 18 Analysis of Credit-Sensitive Mortgage-Backed Securities 337Methodology 338Collateral 339Structure 342Results 346Exercises 352Part Five Asset-Backed SecuritiesChapter 19 Auto-Loan Asset-Backed Securities 355Auto Asset-Backed Securities Issuance 355Collateral and Loan Characteristics 355Environment 357Valuation 364Exercises 365Chapter 20 Credit-Card Asset-Backed Securities 367Credit-Card Asset-Backed Securities Issuance 367Credit-Card Asset-Backed Securities Structures 369Rating Agency Criteria 373Exercises 377Chapter 21 Manufactured-Housing Asset-Backed Securities 379Manufactured-Housing Asset-Backed Securities Issuance 379Collateral and Loan Features 382Manufactured-Housing Asset-Backed Securities Structures 383Prepayments 384Rating Agency Criteria 386Recent Performance in Context 388Exercises 388Part Six Commercial MortgagesChapter 22 Commercial Loans 391Types of Income-Producing Properties 391General Risk Evaluation 392Leases 397Valuing Income-Producing Properties 398Impact of Financial Leverage 400Exercises 408Chapter 23 Commercial Mortgage-Backed Securities 409Commercial Mortgage-Backed Securities: An Overview 409The Underlying Loan Portfolio 417Role of the Servicer 424Creating a Commercial Mortgage-Backed Securities Model 425The Future of Commercial Mortgage-Backed Securities 425Exercises 426Chapter 24 The Role of Real Estate Investment Trusts (REITs) 429Background 429Qualifying as a Real Estate Investment Trust 430Tax Ramifications for Real Estate Investment Trusts 430Types of Real Estate Investment Trusts 430Real Estate Investment Trust Structures 431Property Types 432A Bit of History 434Real Estate Investment Trust Initial Public Offerings 436International Real Estate Return Performance 437Real Estate Investment Trust Valuation 438Other Factors Influencing Real Estate Investment Trust Valuation and Performance 442Exercises 443Part Seven The European Securitization MarketChapter 25 Development of a Market 447Size of Market 449Type of Assets 453Securitization Outside Europe and the United States 460Exercises 464Chapter 26 European Residential Mortgages 465Property Value Loss and Default Risk 469Legal and Tax Issues for Residential Mortgages 471Mortgage Collateral Characteristics 476Principal Payment Rules 478Interest Payment Rules 482Prepayments and Other Risks 484Exercises 487Chapter 27 European Securitization Legislation 489Type of Law 489Securing the Asset 491Exercises 502Chapter 28 Structuring Asset-Backed Securities in Europe 503The European Approach 503Assessing the Collateral 504Issues in Bond Structuring 514Legal Process and Counterparties 520Timing and Costs 524Exercises 525Bibliography 527Additional Resources 531About the CD-ROM 533Index 537