MBS Market and Agency Pass-Through Securities

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Course Features

  • Course date:08/22/2019
  • Course Duration: 2 Day
  • Level: Beginner-intermediate
  • Prerequisites: None
  • Method: Live & Virtual
  • Venue: MicroTek
  • Time: 9:00 am – 5:00 pm
  • Dress Code: Business Casual
  • Category:
  • Certificate: Yes
  • CPE Credits: 14
  • Course Code: 802

OVERVIEW OF THE MORTGAGE BACKED SECURITIES MARKET

  • Characteristics of MBS and MBS Market
  • Evolution of MBS Market

 

U.S. MORTGAGE AGENCIES

The “Agencies”

  • Federal National Mortgage Association (Fannie Mae or FNMA)
  • Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC)
  • Government National Mortgage Association (Ginnie Mae or GNMA)

Agency-related Issues

  • Government agency versus government sponsored enterprise (GSE)
  • Types of loans securitized
  • Nature and provider of guarantee of agency MBS

 

MORTGAGE LOANS

Nature of Loans – Locked (or Frozen) Pledge

Types of Loans by Repayment Terms and Related Cash Flows

  • Most common – fixed rate, level payment, fully amortizing
  • Other: balloons, interest only, fixed or floating interest rates

Methods of Categorizing Loans

  • By property type: single-family residential, multi-family and commercial
  • Purchase money versus refinancing mortgages
  • Conventional mortgages
  • Conforming and non-conforming mortgages

 

AGENCY SINGLE-FAMILY RESIDENTIAL MORTGAGE PASS-THROUGHS

Acquisition of Loans/Loan Securitization

  • Loans purchased for cash or in exchange for pass-through securities
  • Securitized loan held (owed) by grantor trusts
  • Investors buy a claim (equity interest) in the trust account

Cash Flows from Borrowers to Investors (Pro Rata Share of all Distributions)

  • Payments by borrowers – interest and principal according to loan terms
  • Loan servicing – servicers responsibilities and fees
  • Servicers sends principal and interest (less fees) to trust account agent
  • Investors receive all principal collected, whether timely or prepaid
  • Agency guarantees cover any delinquencies
  • Investors receive pass-through rate of interest on outstanding principal
  • Excess spread retained by agency

Characteristics of Loan Pools (Homogeneous Loan Pools)

  • Same type of property
  • Same/similar loan interest rates – rules regarding range of includable rates
  • Same original term
  • WAC, WAM, WALA – weighted average coupon, maturity and loan age

Risks of Agency Pass-through securities

  • Minimal (FNMA and FHLMC) or no (GNMA) default risk
  • Prepayment risk (embedded optionality or uncertain average life)
  • Giants, Megas and Platinum Securities – Pooling of Pass-through Securities

 

PREPAYMENT RISK OF SINGLE-FAMILY RESIDENTIAL SECURITIZATIONS

Factors Impacting Prepayment Rates (Variables in Prepayment Models)

  • Current mortgage rates – impact on housing sales and refinancing activity
  • Housing cost versus consumer buying power (e.g. income or wealth)
  • State of the economy
  • Population demographics

Uncertain Average Life

  • Investors will analyze and compare MBS on basis of average life
  • Impossible to forecast accurately
  • Average life will change, typically in the direction adverse to investors

 

TRADING AND SETTLEMENT OF AGENCY PASS-THROUGH SECURITIES

Types of MBS Trades – Specified and TBA (To Be Announced) Trades

Uses of TBA Trades (Beyond Buying to Take Delivery)

  • Long positions with leverage
  • MBS long investors or dealers can hedge holdings of MBS
  • Hedging – e.g. mortgage originators hedge mortgage pipeline risk
  • No requirement to deliver, positions can be rolled forward

 

TBA Trade Pricing

  • TBA trades are forward trades in agency pass-through securities
  • TBA prices based on cost of carry forward pricing
  • Impact of positive and negative carry

 

Instructor

  • John Donato has a broad range of experience in the financial industry, including trading, brokering, and designing many aspects of real-time fixed income and foreign exchange trading systems for interdealer markets. John began his career with trading and risk management roles in fixed income and foreign exchange markets with commercial banks in New York. Among …
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