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Mortgage Back Securities

Mortgage Back Securities. Finance Club – Sales & Trading Presentation Series. What are Mortgage Back Securities?.

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Mortgage Back Securities

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  1. Mortgage Back Securities Finance Club – Sales & Trading Presentation Series

  2. What are Mortgage Back Securities? • Mortgage-backed securities (MBS) are products that use pools of mortgages as collateral for the issuance of securities. Although these securities have been collateralized using many types of mortgages, most are collateralized by one- to four-family residential properties. MBS can be broadly classified into four basic categories: • 1. mortgage-backed bonds • 2. pass-through securities • 3. collateralized mortgage obligations (CMO) and real estate mortgage investment conduits (REMICS) • 4. stripped mortgage-backed securities

  3. Prepayment Structure “101”

  4. Historical Context • “Early 2000 everyone took a step back as the curve was steep” • Increasing complexity of CMO Industry • Evolution of dealers managing interest rate risk with treasuries • Customers - Banks, Money Mangers, Pension funds, Agencies

  5. Current Landscape • Market Conditions • Risks • Wall Street Competitive Advantages • Opportunities for Expansion

  6. Market Conditions – “A Consumer Focus” • Macro Factors • Overheating Housing Market • Rising interest rate environment • Origination volumes cooling • leveraged borrower could = slow consumption • Curve flattening = Weakening demand for MBS • Banks shifting to Non-Agency MBS

  7. Non-Agency Issuance

  8. Risks • More Dealers = Competitive pricing • Banks & Savings institutions decreasing their Mortgage holdings • Increase in Arm originations with, a regional focus (CA, FL) • Decreasing credit quality of originations • New Product Development • Agency/Non-Agency – Arms and I/O Neg-Am

  9. Wall Street Competitive Advantages Client Relationships • Vertical Integration Origination Securitization Capital Markets Competition Local/National Originators MBS Research

  10. Opportunities for Expansion • Origination • Expand product mix into deeper credit quality • Alt B • Credit solutions • Move back from hybrids to fixed • Delinquency Business Platform • Agency & Non-Agency • Increased Demand in Asia • New Structures – Combine 2-3 Rich bonds • Derivatives - Floaters

  11. Questions & References Websites www.investinginbonds.com Books “The Mortgage Backed Securities Workbook” by Davidson & Herskovitz “Handbook of Mortgage Backed Securities” by Frank J Fabozzi

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