Securitization: Structuring and Investment Analysis / Edition 1

by Andrew Davidson, Anthony Sanders, Lan-Ling Wolff, Anne Ching

Overview

A complete guide to securitization.
* Analyzes leases, tax liens, and other new securitization markets developing globally.
* Contains exercises and examples taken from real transactions.
* Companion CD-ROM includes calculation tools and examples, data for models, ongoing updates on models, and Q&A with authors to address complex securitization questions.

Product Details

ISBN-13:	9780471022602
Publisher:	Wiley
Publication date:	09/08/2003
Series:	Wiley Finance , #219
Edition description:	Includes CDROM
Pages:	576
Product dimensions:	6.42(w) x 9.27(h) x 1.33(d)

About the Author

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.

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Table of Contents

Part One Introduction to Securitization

Chapter 1 The Role of Securitization 3

Summary of Major Asset Classes 4

Key Concepts 7

Key Players in Securitization 9

Key Investment Characteristics of Securities (Bonds) 11

Exercises 12

Chapter 2 Fundamentals of Structuring 15

Issuer’s Motivations: Legal, Accounting, and Tax Considerations 15

Issues in Balance-Sheet Analysis 18

The Structuring Process 20

Issuing Vehicles 20

Exercises 27

Chapter 3 Fundamentals of Investment Analysis 29

Types of Investors 32

Analyzing Securities 35

Exercises 40

Chapter 4 Historical Performance of Asset-Backed Securities and Mortgage-Backed Securities 41

Comparing Returns on Alternative Asset-Backed Securities and Mortgage-Backed Securities Investments 41

A Case Study of Market Turbulence 43

Performance of Mortgage-Backed Securities and Asset-Backed Securities 45

Exercises 47

Part Two Agency Mortgage-Backed Securities

Chapter 5 Mortgage Loans: The Basis of Mortgage-Backed Securities 51

What Is a Mortgage? 51

How Large Is the Mortgage Market? 53

Types of Mortgages 54

Adjustable-Rate Mortgages 62

Graduated-Payment Mortgages 65

Shared-Appreciation Mortgages 66

Reverse-Annuity Mortgage 67

Mortgage Default and Legal Issues Concerning Mortgages 68

The Federal National Mortgage Association/Federal Home Loan Mortgage Corporation Uniform Loan Contract 73

Exercises 74

Chapter 6 Agency Pass-Throughs 75

The Role of Government Agencies and Government-Sponsored Enterprises 75

Brief History of the Agency Market 76

Key Terms for Agency Pass-Throughs 80

Mechanics of the Pool Programs 82

Agency Programs 82

Trading of Agency Mortgage-Backed Securities 84

Exercises 87

Chapter 7 Fundamentals of the Interest-Rate Market 89

Bond Prices and Interest Rates 89

Forward Rates and Risk Neutrality 98

Completing the Curve 104

Exercises 107

Chapter 8 Static Analysis for Mortgage Pass-Through Securities 109

Methodology 109

Collateral 110

Structure 114

Results 120

Exercises 127

Chapter 9 Mortgage-Backed Securities Prepayments 131

Sources of Prepayments 132

Prepayment Data 133

Analyzing Prepayments 136

Prepayment Models 144

Exercises 152

Chapter 10 Total-Return Scenario Analysis 155

Methodology 156

Collateral 164

Structure 166

Results 169

Exercises 178

Part Three Advanced Mortgage-Backed Securities and Analysis

Chapter 11 Structuring CMOs, IOs, and POs 185

Collateralized-Mortgage Obligations as Rules 187

Principal-Pay Types 196

Interest-Pay Types 196

Sequential Bonds 196

Pro Rata Bonds 198

Scheduled Bonds 200

Sequential PACs and Other Combinations 205

Interest Only and Principal Only 206

Senior/Subordinated Structures 208

Exercises 209

Chapter 12 Interest-Rate Volatility, Options, and Models 215

The Concept and Measures of Volatility 215

Valuation in Stochastic Arbitrage-Free World 224

Valuation of Options and Embedded-Option Bonds 228

Term-Structure Models 241

Exercises 247

Chapter 13 Option-Adjusted Spread 249

Methodology 249

Collateral 261

Structure 263

Results 264

Exercises 268

Chapter 14 Comparing Investment Alternatives 275

Mortgage-Backed Securities 275

Interest Only and Principal Only Securities 277

Collateralized-Mortgage Obligations 279

Exercises 283

Part Four Non-Agency Mortgage-Backed Securities and Analyzing Credit Risk

Chapter 15 Non-Agency Mortgage-Backed Securities 287

Historical Overview of the Non-Agency/Private-Label Market 287

Private-Label Mortgage-Backed Securities Collateral Types 288

Credit Enhancement 289

Exercises 301

Chapter 16 Collateral Performance 303

Collateral Cash Flows 303

Modeling Collateral Cash Flows 303

Exercises 323

Chapter 17 Home Equity and Subprime Loans 325

Home Equity Loan Asset-Backed Securities Issuance 325

Environment 330

Prepayment 330

Home Equity Loan Asset-Backed Securities 331

Exercises 335

Chapter 18 Analysis of Credit-Sensitive Mortgage-Backed Securities 337

Methodology 338

Collateral 339

Structure 342

Results 346

Exercises 352

Part Five Asset-Backed Securities

Chapter 19 Auto-Loan Asset-Backed Securities 355

Auto Asset-Backed Securities Issuance 355

Collateral and Loan Characteristics 355

Environment 357

Valuation 364

Exercises 365

Chapter 20 Credit-Card Asset-Backed Securities 367

Credit-Card Asset-Backed Securities Issuance 367

Credit-Card Asset-Backed Securities Structures 369

Rating Agency Criteria 373

Exercises 377

Chapter 21 Manufactured-Housing Asset-Backed Securities 379

Manufactured-Housing Asset-Backed Securities Issuance 379

Collateral and Loan Features 382

Manufactured-Housing Asset-Backed Securities Structures 383

Prepayments 384

Rating Agency Criteria 386

Recent Performance in Context 388

Exercises 388

Part Six Commercial Mortgages

Chapter 22 Commercial Loans 391

Types of Income-Producing Properties 391

General Risk Evaluation 392

Leases 397

Valuing Income-Producing Properties 398

Impact of Financial Leverage 400

Exercises 408

Chapter 23 Commercial Mortgage-Backed Securities 409

Commercial Mortgage-Backed Securities: An Overview 409

The Underlying Loan Portfolio 417

Role of the Servicer 424

Creating a Commercial Mortgage-Backed Securities Model 425

The Future of Commercial Mortgage-Backed Securities 425

Exercises 426

Chapter 24 The Role of Real Estate Investment Trusts (REITs) 429

Background 429

Qualifying as a Real Estate Investment Trust 430

Tax Ramifications for Real Estate Investment Trusts 430

Types of Real Estate Investment Trusts 430

Real Estate Investment Trust Structures 431

Property Types 432

A Bit of History 434

Real Estate Investment Trust Initial Public Offerings 436

International Real Estate Return Performance 437

Real Estate Investment Trust Valuation 438

Other Factors Influencing Real Estate Investment Trust Valuation and Performance 442

Exercises 443

Part Seven The European Securitization Market

Chapter 25 Development of a Market 447

Size of Market 449

Type of Assets 453

Securitization Outside Europe and the United States 460

Exercises 464

Chapter 26 European Residential Mortgages 465

Property Value Loss and Default Risk 469

Legal and Tax Issues for Residential Mortgages 471

Mortgage Collateral Characteristics 476

Principal Payment Rules 478

Interest Payment Rules 482

Prepayments and Other Risks 484

Exercises 487

Chapter 27 European Securitization Legislation 489

Type of Law 489

Securing the Asset 491

Exercises 502

Chapter 28 Structuring Asset-Backed Securities in Europe 503

The European Approach 503

Assessing the Collateral 504

Issues in Bond Structuring 514

Legal Process and Counterparties 520

Timing and Costs 524

Exercises 525

Bibliography 527

Additional Resources 531

About the CD-ROM 533

Index 537