Details

<p>Foreword iii</p> <p>Acknowledgments v</p> <p>Introduction ix</p> <p>Preface xix</p> <p><b>Part I Valuation of Fixed Income Securities 1</b></p> <p><b>Chapter 1 The Time Value of Money 3</b></p> <p>1.1 Present Value 4</p> <p>1.2 Future Value 5</p> <p>1.3 Present Value of an Annuity 6</p> <p>1.4 Future Value of an Annuity 7</p> <p>1.5 Solving Financial Questions with Present and Future Value 8</p> <p>1.6 Application to Fixed Income Securities 9</p> <p><b>Chapter 2 Theories of the Term Structure of Interest Rates 11</b></p> <p>2.1 The Rational or Pure Expectations Hypothesis 13</p> <p>2.2 The Market Segmentation Theory 17</p> <p>2.3 The Liquidity Preference Theory 17</p> <p>2.4 Modeling the Term Structure of Interest Rates 19</p> <p>2.5 Application of Spot and Forward Rates 21</p> <p><b>Chapter 3 Fixed Income Metrics 27</b></p> <p>3.1 Maturity 28</p> <p>3.2 Yield to Maturity 28</p> <p>3.3 Weighted Average Life 34</p> <p>3.4 Duration 36</p> <p>3.4.1 Macaulay Duration 37</p> <p>3.4.2 Modified Duration 39</p> <p>3.5 Convexity 42</p> <p>3.6 Fisher-Weil Duration and Convexity 45</p> <p>3.7 Effective Duration 51</p> <p>3.8 Effective Convexity 53</p> <p>3.9 Summing the Aforementioned Measures of Duration and Convexity 54</p> <p>3.10 Key Rate Duration 55</p> <p><b>Chapter 4 The Valuation of Fixed Income Securities 59</b></p> <p>4.1 A Valuation Framework for Fixed Income Securities 60</p> <p>4.2 Application of the Framework to Structured Securities 61</p> <p>4.3 Twist and Shift: Characterizing Changes in the Level, Steepness, and Curvature of the Term Structure 63</p> <p>4.4 Case Study: 4.00% 30-year MBS 65</p> <p>4.5 Scenario Comparative Analysis 74</p> <p><b>Chapter 5 Fixed Income Return Analysis 77</b></p> <p>5.1 Return Strategies 78</p> <p>5.2 The Components of Return 80</p> <p>5.3 The Buy and Hold Strategy 80</p> <p>5.4 Total and Absolute Returns 83</p> <p>5.5 Deconstructing the Fixed Income Return Profile 84</p> <p>5.6 Estimating Bond Returns with Price and Risk Measures 86</p> <p><b>Part II Residential Mortgage Backed Securities 89</b></p> <p><b>Chapter 6 Understanding Mortgage Lending and Loans 91</b></p> <p>6.1 Classification of Real Estate 92</p> <p>6.2 Residential Mortgage Loan Amortization 100</p> <p>6.3 Deconstructing the Amortization Table 103</p> <p>6.4 Mortgage Servicing 104</p> <p><b>Chapter 7 Modeling Cash Flows 107</b></p> <p>7.1 Prepayment Conventions 108</p> <p>7.2 Modeling MBS Cash Flows 111</p> <p>7.2.1 0% PPC Assumption - No Prepayment 112</p> <p><b>Chapter 8 Mortgage Prepayment Analysis 117</b></p> <p>8.1 Big Data - What is it? 118</p> <p>8.2 The Statistical Learner 118</p> <p>8.3 Survival Analysis 120</p> <p>8.4 The Cox Proportional Hazards Model 125</p> <p>8.5 Data Types 127</p> <p>8.6 Case Study: FHLMC 30-yr Loan Level Prepayment Analysis 128</p> <p>8.7 Survival Analysis - Modeling Loan Cohorts 139</p> <p><b>Chapter 9 The Predictive Prepayment Model 145</b></p> <p>9.1 Turnover 147</p> <p>9.2 Loan Seasoning 147</p> <p>9.3 Seasonality 149</p> <p>9.4 Borrower Incentive to Refinance 150</p> <p>9.5 Borrower Burnout 153</p> <p>9.6 Application of the Prepayment Model 162</p> <p><b>Part III Valuation of Mortgage Backed Securities 167</b></p> <p><b>Chapter 10 Mortgage Dollar Roll 169</b></p> <p>10.1 Evaluating the Dollar Roll 171</p> <p>10.2 Risk Associated with the Dollar Roll 179</p> <p><b>Chapter 11 Relative Value Analysis 183</b></p> <p>11.1 Liquidity 184</p> <p>11.2 Static Cash Flow Analysis 185</p> <p>11.3 Return Analysis 189</p> <p><b>Chapter 12 Option Adjusted Spread Analysis 197</b></p> <p>12.1 Numerical Methods of Modern Financial Theory 199</p> <p>12.2 Cox, Ingersoll, Ross Theory of the Term Structure 201</p> <p>12.3 Calibrating the Model 206</p> <p>12.4 Building the Option Adjusted Spread (OAS) Model 208</p> <p>12.5 OAS Analysis as a Decision Making Tool 216</p> <p>12.6 OAS Distribution Analysis 219</p> <p>12.7 OAS Analysis Strengths and Limitations 225</p> <p><b>Part IV Structuring Mortgage Backed Securities 227</b></p> <p><b>Chapter 13 Introduction to REMICs 229</b></p> <p>13.1 Background and Legal Structure 230</p> <p>13.2 Two Tiered REMICs 234</p> <p>13.3 REMIC Arbitrage 235</p> <p>13.4 Bond Lab MBS Structuring Model 237</p> <p><b>Chapter 14 Stripped Mortgage Backed Securities 239</b></p> <p>14.1 Key Rate Duration Analysis 243</p> <p>14.2 Option Adjusted Spread Analysis 245</p> <p>14.3 The Information Content of the IO-PO Market 249</p> <p><b>Chapter 15 Sequentially Structured REMIC 255</b></p> <p>15.1 Key Rate Duration Analysis 259</p> <p>15.2 Option Adjusted Spread Analysis 261</p> <p>15.3 Weighted Average Life and Spot Spread Analysis 261</p> <p>15.4 Static Cash Flow Analysis 266</p> <p><b>Chapter 16 Planned Amortization Class (PAC) and Companion REMICs 269</b></p> <p>16.1 The PAC Bond Sinking Fund Schedule 270</p> <p>16.2 Key Rate Duration Analysis 277</p> <p>16.3 Option Adjusted Spread Analysis 279</p> <p>16.4 OAS Distribution Analysis 280</p> <p>16.5 A Final Word Regarding PAC Bands 284</p> <p>16.6 Static Cash Flow Analysis 285</p> <p><b>Chapter 17 Sequential IO REMIC 287</b></p> <p>17.1 Key Rate Duration Analysis 290</p> <p>17.2 OAS Distribution Analysis 292</p> <p><b>Chapter 18 PAC-Floater-Inverse Floater REMIC 295</b></p> <p>18.1 Structuring the Floater and Inverse Floater 296</p> <p>18.2 A Framework for Floating Rate Securities 301</p> <p>18.3 Option Adjusted Spread Analysis 304</p> <p>18.4 Key Rate Duration Analysis 304</p> <p><b>Chapter 19 Accrual REMIC Z-bond 311</b></p> <p>19.1 Key Rate Duration Analysis 317</p> <p>19.2 Option Adjusted Spread Analysis 318</p> <p><b>Part V Mortgage Credit Analysis 323</b></p> <p><b>Chapter 20 Mortgage Default Modeling 325</b></p> <p>20.1 Case Study FHLMC 30-year Default Analysis 327</p> <p>20.2 Other Variables Influencing Borrower Default 335</p> <p>20.3 Spread at Origination (SATO) and Default 340</p> <p>20.4 Default Model Selection 340</p> <p><b>Chapter 21 The Predictive Default Model 345</b></p> <p>21.1 Constant Default Rate 347</p> <p>21.2 Borrower Original Loan to Value Default Multiplier 348</p> <p>21.3 Updated Loan to Value Default Multiplier 349</p> <p>21.4 Spread at Origination (SATO) Default Multipliers 351</p> <p>21.5 Completing the Prepayment Model 353</p> <p><b>Chapter 22 The Basics of Private Label MBS 357</b></p> <p>22.3 Y Structure 359</p> <p>22.4 Shifting Interest 362</p> <p>22.5 Deep Mortgage Insurance MI 363</p> <p>22.6 Excess Interest 365</p> <p>22.7 Overcollateralization 366</p> <p>22.8 Structural Credit Protection 366</p> <p>22.9 Hedging Asset/Liability Mismatches 369</p> <p><b>Chapter 23 Sizing Mortgage Credit Enhancement 373</b></p> <p>23.1 Simulating Borrower Default Rates 375</p> <p>23.2 Estimation of Cumulative Default Rates 375</p> <p>23.3 Translating Credit Enhancement to a Third Party Guarantee Fee 378</p> <p>23.4 Role of the Credit Rating Agencies (NRSROs) 379</p> <p>Chapter 24 Index 383</p>

<P><B>GLENN M. SCHULTZ</B> is the Director of mortgage analytics for Performance Trust Capital Partners. He co-edited (with Frank Fabozzi) <i>Structured Products and Related Credit Derivatives </i>(Wiley), as well as authored several chapters in the <i>Handbook of MBS Securities</i> and <i>The Handbook of Fixed Income Securities</i>.

<p>The mortgage- and asset-backed securities markets are viewed as the most complex of the securities markets. Motivated by the aftermath of the financial crisis and inspired by industry calls for open source waterfalls, investing expert Glenn Schultz sets out to develop the first open source software application for the analysis of mortgage-backed and asset-backed securities. Aided by open source analytics, Glenn outlines a valuation framework for the analysis of mortgage- and asset-backed securities. The successful results are shared in <i>Investing in Mortgage-Backed and Asset-Backed Securities</i>. Written in the spirit of reproducible research, this book allows the reader, for the first time ever, to replicate the mortgage analytics presented herein. <p>Indeed, all the information, financial models, and software needed to successfully invest in and manage a portfolio of mortgage-backed (MBS) and asset-backed (ABS) securities are available at a professional level through open source software, and Glenn walks you through the process of putting it all together in a powerful R and open source analytics package called Bond Lab^®. The open source software is available for download on the book’s companion website and enables you to fully reproduce the analysis and valuation models outlined in the book. <p>Logically organized to serve as a cover-to-cover instruction guide as well as an everyday reference, <i>Investing in Mortgage-Backed and Asset-Backed Securities</i> starts you on the path to mastering: <ul><li>The fundamental principals of the time value of money and term structure modeling</li> <li>The comprehensive framework for the valuation of fixed income securities, especially those assets whose principal amortizes over the life of the investment</li> <li>Fixed income return analysis and how horizon return is applied to determine relative value across the mortgage- and asset-backed securities markets </li> <li>Using option-adjusted spread (OAS) analysis, perhaps the least understood and most misapplied valuation tool, as an accurate investment decision-making tool</li> <li> REMIC (CMO) structuring, the application of the division of principal and interest to create REMIC structures meeting investors unique risk/reward profile</li> <li>Default modeling, self-insuring mortgage structures, and the basics of sizing mortgage credit enhancement</li> <li>A comprehensive analysis of REMIC arbitrage and how dealers use derivative structures to maximize the value of the arbitrage</li></ul> <p>Groundbreaking in its purpose and execution, <i>Investing in Mortgage-Backed and Asset-Backed Securities </i>skillfully shows you how to build powerful models and proprietary analytical platforms to build a custom open source technology stack for the analysis of mortgage-backed and asset-backed securities.

US