20180418CFA一级固收重难点 ABS 曾老师

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MBS

RMBS

CMBS: call protection (prepayment protection)

agency RMBS

non-agency RMBS

MPS

CMO

sequential-pay tranches

PAC tranches(support tranches)

floating-rate tranches

time tranches(prepayment risk)

non-mortgage asset-backed securitiesauto loan ABS

credit card receivable ABSCDO

internal credit enhancement

external credit enhancement

credit tranche(credit risk)

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Chapter

Introduction to Securitization

Mortgage-Backed Securities (MBS)

Non-Mortgage Asset-Backed Securities

Collateralized Debt Obligations (CDO)




originator

customers

SPV ABS investors

buy equipment pay the loan

sell equipment make the loan

sell the loan sell ABS


n They securitize assets to create ABS that are then sold toinvestors.

n SPVs are bankruptcy remote vehicles.

SPV/SPE（特殊目的载体）



Chapter







n Residential Mortgage-Backed Securities (RMBS)n Commercial Mortgage-Backed Securities (CMBS)



MBS

RMBS


agency RMBS

non-agency RMBS

MPS

CMO











n 由政府机构发行：吉利美(Ginnie Mae)。n 由准政府机构发行：房利美(Fannie Mae)、房地美(Freddie Mae)。n 机构RMBS资产池中的贷款必须满足：

ü maximum size of the loan;ü the loan documentation required;ü The maximum loan-to-value ratio; ü and whether or not insurance is required.

n Conforming mortgagen Non-conforming mortgage

Agency RMBS: no credit risk

Residential Mortgage-Backed Securities (RMBS)


MBS

RMBS


agency RMBS

non-agency RMBS

MPS

CMO











n Mortgage Pass-Through Securitiesü 抵押贷款传递证券是机构RMBS的一种，它的资产池是由

一系列居民住房抵押贷款组成的，这些贷款产生的现金流（借款人支付的利息、偿还的本金或提前还款金额）不经过任何分层组合，原原本本地支付给RMBS的投资者，没有现金流偿还的优先顺序，没有对基础资产进行分层，只是对基础资产产生的现金流进行了平均分割。




n Mortgage Pass-Through Securities



Pool

Mortgage 1

Mortgage 2

Mortgage…

Mortgage N

Pass-through securities backed by the pool are issued to investors

Investor 1

Investor 2

Investor …

Investor N


n Mortgage Pass-Through Securitiesü Pass-through rate: a mortgage pass-through security’s

coupon rate.• The pass-through rate=the mortgage rate on the

underlying pool of mortgages−the servicing and otheradministrative fees.

ü WAC-weighted average coupon rate: 对资产池中每笔贷款的利率进行加权求和。

ü WAM-weighted average maturity: 对资产池中每笔贷款的期限进行加权求和。




Assume that a pool includes three mortgages with thefollowing characteristics:

The outstanding amount of three mortgages isUS$10,000. Thus, the weights of Mortgages 1, 2, and 3are 10%, 30%, and 60%, respectively.

Example

MortgageOutstanding Mortgage

Balance ($)Coupon Rate (%)

Number of Months to Maturity

1 1,000 5.1 342 3,000 5.7 763 6,000 5.3 88


The WAC is: 10%×5.1%+30%×5.7%+60%×5.3%=5.4%The WAM is: 10%×34+30%×76+60%×88=79 months

Answer


n Mortgage Pass-Through Securitiesü Prepayment risk• Contraction risk: when interest rates decline, actual

prepayments>forecasted prepayments, investors’ holding period decline.

• Extension risk: when interest rates rise, actual prepayments<forecasted prepayments, investors’ holding period increase.




n Mortgage Pass-Through Securitiesü Prepayment risk• Single monthly mortality rate (SMM)

= prepayment for the month(beginning outstanding mortgage balance for the month−

scheduled principal repayment for the month)• Conditional prepayment rate (CPR): An annualized measure

of prepayments.




n Mortgage Pass-Through Securitiesü Public securities association (PSA): a prepayment

benchmark to evaluate the prepayment risk.• Benchmark: 100PSA• PSA assumption>100PSA: prepayment faster than the

benchmark• PSA assumption<100PSA: prepayment slower than the

benchmark




A prepayment rate of 80 PSA means that investors can expect:A. 80% of the par value of the mortgage pass-through security tobe repaid prior to the security’s maturity.

B. 80% of the borrowers whose mortgages are included in thecollateral backing the mortgage pass-through security toprepay their mortgages.

C. the prepayment rate of the mortgages included in the collateralbacking the mortgage pass-through security to be 80% of themonthly prepayment rates forecasted by the PSA model.

Example


n Mortgage Pass-Through Securitiesü Weighted average life or average life

• RMBS的平均还款期，按照约定，MBS投资者收回所有本金（按照摊销每月归还的本金+按照计划提前归还的本金）的平均时间是多久。



PSA assumption 100 125 165 250 400 600

Average life (years)

11.2 10.1 8.6 6.4 4.5 3.2


n Collateralized mortgage obligations (CMO)ü Basic features• Various tranches.• The collateral is MPS.• CMO cannot eliminate prepayment risk, but it can

distribute different risk to different tranches.




MBS

RMBS


agency RMBS

non-agency RMBS

MPS

CMO











n Collateralized mortgage obligations (CMO)ü Sequential-Pay CMO Structures



Tranche Par Amount (US$ millions) Coupon Rate (%)

A 386 5.5B 72 5.5C 193 5.5D 146 5.5

Total 800


n Collateralized mortgage obligations (CMO)

ü Sequential-Pay CMO Structures

• Investors concerned about extension risk will invest in tranches A

or B; Investors concerned about contraction risk will invest in

tranches C or D.



Tranche Contraction risk Extension risk

A HIGH

LOW

LOW

HIGH

B

C

D

…



ü Planned amortization class (PAC) tranches（按计划摊还层级）• If the prepayment rate is within a specified band

(PAC band, initial PAC collar) over the collateral’s life, the PAC tranches’ cash flows will

be predictable.• The non-PAC tranches (support tranches or

companion tranches) protect the PAC tranches.





PSA Speed PAC I Tranche Support Tranche0 13.2 24

50 8.8 21.2100 6.5 17.1150 6.5 13.3

200 6.5 initial collar 10.4

250 6.5 5.2300 6.5 2.9350 5.9 2.4400 5.4 1.8450 4.6 1.5500 4.2 1.2


n Collateralized mortgage obligations (CMO)ü Planned amortization class (PAC) tranches• Collateral prepayments<forecasted principal repayment: the

support tranches do not receive any principal repayment until thePAC tranches receive their scheduled principal repayment.

– PAC tranches’ extension risk is reduced. • Collateral prepayments>forecasted principal repayment: the

support tranches absorb any principal repayments in excess of thescheduled principal repayments.

– PAC tranches’ contraction risk is reduced.





Tranches Prepayment risk Contraction risk Extension risk

PAC Tranches

Alow

high lowBC low high

Support tranche high


In a securitization structure, time tranching provides investorswith the ability to choose between:A. extension risk and contraction risk.B. fully amortizing loans and partially amortizing loans.C. senior bonds and subordinate bonds.

Example


Referring to the graph, the tranche of CMO that is most suitable foran investor concerned about contraction risk is:

A. P-A (PAC)B. P-D (PAC)C. S (support)

Example

Tranche Par Amount (US$ million) Coupon Rate (%)P-A (PAC) 287.6 5.5P-B (PAC) 90.0 5.5P-C (PAC) 60.0 5.5P-D (PAC) 50.0 5.5S (support) 312.4 5.5

Total 800.0



ü Floating-rate tranche



Tranche Notional Coupon rate

A 52m 9%

B 9m 9%

C 39m 9%

Total 100m 9%

Tranche Notional Coupon rateA 52m 9%B 9m 9%

Floater 26m LIBOR+50bpInverse

floater13m 26%-2LIBOR


The tranche of a collateralized mortgage obligation that ismost suitable for an investor who expects a fall in interestrates is:A. a fixed-rate tranche.B. an inverse floating-rate tranche.C. a PAC tranche.

Example


MBS

RMBS


agency RMBS

non-agency RMBS

MPS

CMO











n RMBS issued by entities other than Ginnie Mae,Fannie Mae, and Freddie Mae.

n Non-agency RMBS require one or morecredit enhancement.

Non-agency RMBS



n Credit enhancement

Non-agency RMBS


Credit enhancement

Internal credit enhancement

External credit enhancement

Over collateralization

Reserve accounts

Subordination

Guarantees provided by a third party


n Credit enhancement

ü Internal credit enhancement

• Overcollateralization: collateral’s value>par value of

the debt issued.

• Reserve accounts or reserve funds

–Cash reserve fund: a deposit of cash used to absorb losses.

–Excess spread: The yield on the financial assets supporting the debt (mortgage rate)>MBS’s yield.

Non-agency RMBS



n Credit enhancementü Internal credit enhancement• Senior/subordinated structure

–Shifting interest mechanism: locks outsubordinated bond classes from receivingpayments for a period of time if the creditenhancement for senior tranches deterioratesbecause of poor performance of the collateral.

Non-agency RMBS




Bond Class Par Value (US$ million)

A (senior) 180

B (subordinated) 14

C (subordinated) 6

Total 200


n Credit enhancementü External credit enhancement• Surety Bonds: The bonds are issued by insurance companies.• Bank guarantees• Letter of credit from financial institution• Cash collateral account

– 对于Bank guarantees, surety bonds, and letters of credit这几种信用增级方式来说，当担保人不能履行其职责时，投资者会面临 third-party (or counterparty) risk。

– 但cash collateral account能够使投资者避免third-party risk，因为在这种方式下，MBS发行人先从担保人那里借钱，将这些钱存入一个资金账户，然后进行投资，担保人违约不会对这些资金产生影响。

Non-agency RMBS



The external credit enhancement that has the leastamount of third-party risk is a:A. surety bond.B. letter of credit.C. cash collateral account.

Example


MBS

RMBS


agency RMBS

non-agency RMBS

MPS

CMO











n Residential Mortgage-Backed Securities (RMBS)n Commercial Mortgage-Backed Securities (CMBS)



n Commercial real estate: multifamily properties (e.g. apartment

buildings), office buildings, industrial properties (including

warehouses), shopping centers, hotels, and health care facilities.

n CMBS are no recourse loans.

n How to measure the credit risk of CMBS?

ü Debt-to-service coverage ratio (DSC)=net operating income

debt service

• The higher the better.

ü Loan-to-value ratio (LTV)=current mortgage amount

current appraised value

• The lower the better.

Commercial Mortgage-Backed Securities (CMBS)


n Basic CMBS structureü Interest is paid to all tranches.ü 当贷款发生违约时，lowest priority CMBS tranche最先遭

受损失。n Balloon maturity provisions

ü Balloon payment: 到期日有一笔巨额的本金要偿还。ü Balloon risk: the borrower fails to make the balloon

payment.• balloon risk is a type of extension risk.

ü Workout period（贷款展期）: 银行可以延长贷款的期限，但是会要求一个更高的贷款利率。



n Call protection (prepayment protection)ü Loan-level call protection• Prepayment lockout.• Prepayment penalty points.• Yield maintenance charges.• Defeasance: 暂停将提前归还的本金还给MBS投资者，而是用

提前归还的金额投资于国债等金融产品，这些投资产生的现金流和无提前还款时资产池产生的现金流一样。

ü CMBS-level call protection• CMBS loan pools are segregated into tranches.



Chapter


Residential Mortgage Loans






n Auto loan ABSn Credit card receivable ABS




Amortizing loans Non-amortizing loans

De

scri

ptio

ns Auto loan

1. Periodic

scheduled

payments

2. Prepayments.

Credit card receivable

1. Some of these loans will pay off in whole

or in part before the maturity of the bond.

2. Does not involve principal repayment (no

prepayment issue).

Ch

ara

cte

ristics

Composition of the loans in

the pool doesn’t change.

1. no new loans are added.

Composition of the loans in the pool

does change.

1. During the lockout period, principal

received is reinvested in new loans to

replace the amounts paid off.

2. When the lockout period over, any repaid

principal will not be reinvested in new

loans but distributed to the bond classes.


n 信用卡应收账款ABS现金流：

ü Finance charges collected：逾期还款的利息ü Fees:卡费ü Principal repayments

Credit card receivable ABS



Credit card receivable asset-backed securities (ABS) differ from autoloan ABS in the following way:A. credit card loans are recourse loans, whereas auto loans are non-recourse loans.

B. the collateral for credit card receivable-backed securities is a poolof non-amortizing loans, whereas the collateral for auto loan ABSis a pool of amortizing loans.

C. credit card receivable-backed securities have regular principalrepayments, whereas auto loan ABS include a lockout periodduring which the cash proceeds from principal repayments arereinvested in additional loan receivables.

Example


Chapter







n Collateralized debt obligation (CDO): a security backed by adiversified pool of one or more debt obligations.


Corporate bonds Collateralized bond obligation (CBO)Emerging market bonds

Leveraged bank loansCollateralized loan obligation (CLO)

ABS,RMBS,CMBS and other CDOs Structured finance CDOs

A portfolio of credit default swaps Synthetic CDOs


n CDO has three classes of tranches:

ü Senior bonds

ü Mezzanine bonds

ü Subordinated bonds (the residual or equity tranches)

n CDO manager

ü also called “collateral manager” to buy and sell debtobligations for and from the CDO’s collateral (that is, theportfolio of assets) to generate sufficient cash flows to meetthe obligations to the CDO bondholders.



An additional risk of an investment in an arbitragecollateralized debt obligation relative to an investment in anasset-backed security is:A. the default risk on the collateral assets.B. the risk that the CDO manager fails to earn a returnsufficient to pay off the investors in the senior and themezzanine tranches.

C. the risk due to the mismatch between the collateral makingfixed-rate payments and the bond classesmaking floating-rate payments.

Example



MBS

RMBS


agency RMBS

non-agency RMBS

MPS

CMO












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20180418CFA一级固收重难点 ABS 曾老师

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