Single AssetIssuer CMBS

CMBS issuance has been single-asset issuance (see Exhibit 28.4). Since 1997, there have been five transactions totaling more than US 5.7 billion. These first transactions were based almost entirely on the credit rating of a single tenant or entity. The early-1997 transactions were smaller issues financing assets that could have been financed by a single lender. In early 1997, single-asset CMBS issues had a significant financing cost advantage versus traditional...

Dynamic Credit Enhancement

Credit enhancement for the class C notes is typically a note reserve account and excess spread. Exhibit 23.8 provides an example of typical required reserve account levels based on excess spread. Note that the levels require more cash as excess spread declines. This is achieved by trapping excess spread in the deal in lieu of paying it out to the seller. It also illustrates that the lower the excess spread level, the longer it will take to fund the account to required levels. EXHIBIT 23.8...

The Uk Commercial Real Estate Market

Similar to the 1991-1992 North American recession, the U.K. recession had a severe impact on commercial real estate. Therefore, it is not surprising that the U.K. commercial real estate recovery has mirrored the North American recovery. Primarily, while the economy has been exhibiting tremendous growth, funding of commercial real estate development has been on a prelet, no-risk basis. This conservative development funding has created a situation in which current commercial property vacancy...

Prefunding and Recycling Prepayment and Extension Risk

Many student loan ABSs have had prefunding accounts that ranged from 10 to 20 of initial pool assets. Most structures limit prefunding activity to the purchase each month of accrued capitalized interest on loans owned by the trust, to the purchase of loans to existing borrowers held outside the trust that must be purchased by the trust to originate a consolidation loan, and to the purchase of serial loans loans to existing borrowers to finance additional years of schooling. Prefunding generally...

Prepayments And Convexity Of The

Traditional DUS have used yield maintenance,3 prepayment penalties, and lock out periods to discourage prepayment. While the new defeasance based DUS MBS ensures an early voluntary mortgage prepayment has no impact on the investors cash flows. Borrower that chooses to voluntarily prepay a DUS loan during the yield maintenance period are assessed a prepayment fee that is the greater of 1 1 of the unpaid principal balance or 2 the unpaid principal balance times the present value of the difference...

Dus Bond Relative Value

Traditional Fannie Mae DUS bonds have traded at a slight spread premium to swaps because of the single loan structure, which limits liquidity and increases the risk of an involuntary prepayment or a planned prepayment from the mortgage default. Over the past year MBS DUS bonds have usually traded at a 14bp to 25bp premium to 10-year swaps, having established a 14bp average differential during the past year Exhibit 18.7 presents the 10-year DUS MBS differential to the 10-year swap . The first...

Accrual or Z Bonds

Cmo Tranche Types

First, an accrual phase, during which interest is not paid currently, but is instead added to the outstanding principal balance of the bond. Second, a payment phase, when the Z is paid interest and its principal is amortized during this phase the Z is equivalent to a standard, current-pay bond . During the accrual phase, the deferred interest referred to as Z accretion can be used to accelerate the amortization of shorter maturity tranches. Accordingly,...

Cmbs Relative Value And Pricing Methodology

Traditionally commercial mortgage investment has been considered to be a high-risk activity requiring specific market expertise. Therefore when CMBS was introduced, only accounts with specific real estate experience took to the new product and were able to command significant spread differentials. Exhibit 16.13 presents historic CMBS investment-grade spreads. As the market grew and more investors began to follow the CMBS asset class, CMBS spreads tightened. CMBS spreads reached their tightest...

Guide to Fannie Mae Dus Mbss

Securitized multifamily Delegated Underwritings and Servicings loans DUS have strong prepayment protection and carry the creditworthiness of Fannie Mae. This versatile sector can be used in fixed-income portfolios as 1 Substitutes for convex alternatives, such as corporates, agencies, or Treasuries 2 higher quality substitutes for non-agency multifamily or commercial MBSs or 3 alternatives to asset-backed or PACs. To help broaden the understanding of this unique asset class, we have prepared...

Features of the VA Home Loan Program

Veterans Administration VA loans comprise roughly 30 of the loans in Ginnie Mae pools, the remainder being FHA loans.6 There are a number of differences in the procedures governing FHA and VA loan origination and refinancing, and we provide an overview of the salient features of the VA home loan program. The purpose of the VA home loan program is to help veterans finance the purchase of their homes with favorable loan terms and at a competitive rate of interest. This is achieved by guaranteeing...

Deconstructing Mortgage Price Moves A Case Study

On September 14, 1998, TBA Fannie Mae 6.5s were priced at 100-24, and had an effective duration of 3.1, while the 10-year Treasury yield was 4.86 . A month later October 14, 1998, close , the 10-year yield had dropped 29bp. The effective duration would hence have implied a price move for the Fannie Mae 6.5s of or about 29 ticks. The actual price increase was 3 ticks, a discrepancy of 26 ticks. What led to this significant discrepancy We decompose the price move using Equation 14.3 to calculate...

Auto Leases

Some captive finance companies and banks have used the securitization market to finance their vehicle lease portfolios. Leasing now accounts for a substantial proportion of all U.S. vehicle sales between 35 to 45 . Closed-end leases are the most common consumer vehicle leases. In a closed-end lease, the lessor retains ownership of the vehicle. The consumer pays some up-front costs a capitalized cost reduction small down payment equivalent , taxes, registration and other fees and charges. The...

What Is The Market Size And Composition

The ABS market has grown impressively since its inception in the mid-1980s. Issuance grew exponentially in the early years of the market as investors familiarized themselves with structured product and its applications. The market developed new asset classes. Legal and accounting developments facilitated new and more efficient structures. The market evolved in response to issuer and investor needs. Exhibit 2.2 illustrates the growth of the market since its inception, along with the breakdown of...

Loss Curves

Loss Curves

Prime, nonprime and subprime paper will incur losses at different points in their life cycle, and their respective loss curves will look quite different. We EXHIBIT 2.8 Underwriting Characteristics of Auto Issuers EXHIBIT 2.8 Underwriting Characteristics of Auto Issuers EXHIBIT 2.9 Typical Prime and Subprime Nonprime Automobile Loss Curves EXHIBIT 2.9 Typical Prime and Subprime Nonprime Automobile Loss Curves show prime versus subprime nonprime loss curves in Exhibit 2.9.4 Moody's plots loss...

Typical Auto Loan Structures

Loan Structures

We show a typical auto loan structure in Exhibit 2.10. The seller servicer originates a pool of auto loans and sells the receivables, the rights to receive proceeds, and the lien on the vehicles into a bankruptcy-remote grantor or EXHIBIT 2.10 Typical Auto Loan ABS Structure EXHIBIT 2.10 Typical Auto Loan ABS Structure owner trust. The sale is a true sale of assets, meaning that the conditions for sale treatment have been met. The principal and interest is passed along to investors. Most auto...

The Salomon Smith Barney Prepayment Model

Prepayment projections are at the center of all mortgage security valuation and analysis. Since Salomon Brothers pioneered the development of the Street's first prepayment model in the mid-1980s,1 such models have come to be widely used in the mortgage market and are critical for valuation techniques such as option-adjusted spread OAS analysis. However, projecting prepayments is not an exact science. A large body of data now exists on prepayments, but it still only partially covers the range of...

The Refinancing Incentive

What Is the Mortgage Rate Anyone who has taken out a mortgage, or even simply looked at the real estate section of the Sunday paper, will be aware of the differences in mortgage rates and terms offered by lenders in the same area. In addition, there are regional variations in rates, and, perhaps most important, differences in rates based on borrower credit, LTVs, and the size of the loan.16 Finally, there are a variety of mortgage loan types available to a prospective refinancer ARMs, hybrid...

The Seasoning Price

Seasoning refers to the gradual increase in prepayment speeds on a pool of new mortgages over time until a reasonably steady-state speed is reached. A pool of mortgages that has reached this steady-state level is said to be fully seasoned. In addition to loan age, seasoning also depends on several other variables, most notably the strength of the housing market and amount of equity that has been accumulated in the home. Since a majority of currently nWe have chosen to compare a 6 balloon pool...

Securitization in Europe

The first MBS deals in Europe not counting the Danish MBS market were done in the mid-1980s, with United Kingdom mortgages as collateral. There 50 Pfandbriefs are collateralized bonds, with a total market size of close to 1 trillion, of which a quarter are backed by residential mortgages although because the LTV cannot exceed 60 , only a fraction of German mortgages are eligible for Pfandbriefs . However, prepayments are not allowed, and even if a loan is prepaid, the issuer typically does not...

Measuring Prepayments

Psa Prepayment

Prepayments are calculated by comparing actual principal received with scheduled principal the difference is the prepaid principal. The convention is to state prepayment rates in terms of the outstanding principal balance as opposed to, for example, the initial balance . Observed prepayment rates can be stated in one of several different units. Single Monthly Mortality SMM This refers to the prepayment rate for a month and forms the basis for all prepayment calculations. The SMM is the fraction...

An Agency Pass Through Trade

Credit Enhancement

Most agency pass-through trading occurs on a to-be-announced TBA basis. In a TBA trade, the buyer and seller agree on general trade parameters, such as agency, type, coupon, par amount, and price e.g., 100 million of Ginnie EXHIBIT 3.1 A TBA Freddie Mac Gold 30-Year 7 Trade Mae 30-year 7 pass-throughs at a price of 98-141 , but the buyer does not know the specific pools that will be delivered until two business days before the settlement date, when the seller is obligated to provide the...

CMO Bond Types

Credit Protection Cmo

The classes in the hypothetical CMO deal shown in Exhibit 1.19 is usually labeled sequential bonds, for the obvious reason that principal is allocated sequentially to the classes. A detailed description of the structure of MBS is given in Chapter 15, and a glossary of standard agency definitions of the many different bond types developed over the years is given in Appendix B. Here, we provide a brief description of the main types. Accrual or Z-Bonds The Z-bond was the first departure from...