securitization

[object Object],Christopher J. Creed November 2005

Introduction – “… remember back to EC177 and 179” ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Outline ,[object Object],[object Object],[object Object],[object Object]

Fixed Income - Introduction ,[object Object],[object Object],[object Object],[object Object],[object Object]

Fixed Income Basics - Rates ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Fixed Income Basics - Rates ,[object Object],[object Object],[object Object]

Yield of a Bond ,[object Object],[object Object],[object Object],[object Object],[object Object]

“Minimum Yield” – Treasuries ,[object Object],[object Object],[object Object],[object Object],2 – 4.34654 3 – 4.35757 5 – 4.37614 10 – 4.47241 30 – 4.70486 Source: Goldman Sachs

Comparing Bonds vs. US Treasuries ,[object Object],[object Object],[object Object]

“Spread Products” ,[object Object],[object Object],[object Object],[object Object],[object Object]

Interest Rate (Vanilla) Swaps Bank Customer ,[object Object],[object Object],[object Object],[object Object],[object Object]

Interest Rate Swaps ,[object Object],2 4.77127 3 4.80257 4 4.83588 5 4.86864 6 4.89790 7 4.92840 8 4.95754 9 4.98668 10 5.01491 11 5.04320 12 5.06866 13 5.09223 14 5.11359 15 5.13302 20 5.19363 25 5.22237 30 5.23361 35 5.23369 40 5.22861 45 5.22077 50 5.21361

Interest Rate Swaps (cont.) ,[object Object],[object Object],[object Object],[object Object]

2003 vs. Today… A Brand New World November 2003 November 2005 Source: Goldman Sachs

Introduction to Asset Securitization - Example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Tradable Fixed Income Supply Source: Federal Reserve Flow of Funds, June 10 th , 2004, debt growth table

The Mortgage Market ,[object Object],[object Object],Source: Flow of Funds 1Q2004 report

What is a Mortgage? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Home Owner Lending Institution Mortgage Funds =

Calculating Mortgage Payments ,[object Object],[object Object],= $1,498.88

Calculating Mortgage Payments – (cont.) ,[object Object],* Note that $1498.88 – $1250.00 = $248.88

Calculating Mortgage Payments Continued ,[object Object],Rate

What are Mortgage Backed “Pass-Through” Securities? ,[object Object],[object Object],[object Object],[object Object],[object Object],+ + = Securitized Mortgage Pool or Pass-throughs

Agency Conforming MBS Origination Process Residential loans originated within the conforming Agency guidelines are guaranteed by an Agency, sold to the Street then either traded in pass-through form or used to structure a CMO…

Non-Conforming MBS Origination Process Loans that do not conform to Agency standards are sold in “whole loan” form or structured into a senior/subordinate private label CMO…

Credit Enhancement Subordination Terminology ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Credit Enhancement Continued ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Who Buys MBS? ,[object Object],[object Object],Source: Inside MBS & ABS

Overview of the U.S. Mortgage Securities Market ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Why Invest in Mortgages? ,[object Object],[object Object],[object Object],[object Object],[object Object]

What’s the catch? ,[object Object],[object Object],[object Object],[object Object],[object Object]

"Duration" Deserves Special Focus in Mortgages... ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Prepayment Risk

Prepayments PSA Continued ,[object Object]

Duration and Convexity ,[object Object],[object Object],2 3 4 5 6 7 8 0 5 10 15 20 25 30 35 40 Yield (%) gain from convexity (negative) 2 3 4 5 6 7 8 5 10 15 20 25 30 35 40 45 Yield (%) gain from convexity Price Price Positive Convexity Negative Convexity

Options and Convexity ,[object Object],[object Object],[object Object]

Non-Mortgage Asset-Securitization ,[object Object],[object Object],[object Object],[object Object]

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