...1. Background Introduction This paper looks into Cox Proportional Hazards model and constructs a mortgage default model to estimate the hazard rates of certain residential mortgage-backed securities (RMBS) on a loan-level basis. We analyze loans from an individual credit perspective instead of pool-level basis so that the model would closely fit each loan. This gives us the flexibility to adjust portfolio by observing individual loans and re-estimate their risks accordingly. Ever since early 2000s, the issuance of residential mortgage-backed securities were steadily climbing due to the record-setting housing boom we have ever witnessed, then reached the peak at $1.2 trillion in 2005 and 2006, and finally became the center of attention during the crisis. Many investors have been trying to come up with newer and better models to monitor the default risk of RMBS ever since. Now that a majority of RMBS have been downgraded by credit-rating agencies since, it is necessary for investors to learn how to estimate the risk of their mortgage-backed securities to react to the adverse situation. We will skip the background of securitization and structure of mortgage-backed securities. In short, a pool of securitized mortgages gets divided into multiple tranches with different seniorities, ranging from AAA to equity. The higher the seniority goes, the lower risk and return the investors have, and they suffer losses after the lower seniorities do. Although investors look at a pool or...
Words: 374 - Pages: 2
...Mortgage backed Securities I am going to talk briefly about Mortgage backed Securities , just a general overview. In the next few weeks we will get into more details. What are Mortgage Backed Securities? MBS is very much similar to bonds, but here the securities are backed by mortgages. A bond is a promissory note where a corporation (or a Government) obliges to pay a certain sum of money every month and at the end of term repay the original sum back. In the case of MBS, the repayment is backed by mortgage payments (by the homeowner). On a broader level, this is what happens. A few mortgages which are similar in nature are pooled together. They are securitized by either a Quasi governmental agency (FNMA, GNMA etc) or a corporation. These pools of MBS are sold to other institutions. Every month, the owner of the pool will receive a portion of the interest payment and principal on the mortgages. There are many risks associated with the cash flow, right from prepayment to loan defaults. Because of MBS the risk of the loan is distributed among all the stakeholders and is not limited to only the small bank which lent the money ( not sure whether it’s a good thing or a bad thing :-) ) Other than small banks looking for liquidity, MBS is a good way of converting a illiquid asset into a tradable instrument. It allows the banks or the originators to diversify the financing sources as an alternative to traditional bonds and stocks. Balance sheets looks more sleek, and the risk...
Words: 268 - Pages: 2
...Mortgage Backed Securities Presented by: Ahmed Saleem M.Shahryar Murad Syeda Afreen Zehra Syed Muhammad Qasim Presented to: Maha Ijaz Economic Overview The US has the largest and most technologically powerful economy in the world, with a per capita GDP of $49,800. In this market-oriented economy, private individuals and business firms make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, to lay off surplus workers, and to develop new products. At the same time, they face higher barriers to enter their rivals' home markets than foreign firms face entering US markets. US firms are at or near the forefront in technological advances, especially in computers and in medical, aerospace, and military equipment; their advantage has narrowed since the end of World War II. The onrush of technology largely explains the gradual development of a "two-tier labor market" in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits. Since 1975, practically all the gains in household income have gone to the top 20% of households. Since 1996, dividends and capital gains have grown faster than wages or any other category of...
Words: 8225 - Pages: 33
...FI 398 Paper on Liar’s Poker The History of the Secondary Mortgage Market The secondary mortgage market is one of the richest asset classes in the world today. This market is formed by the trading of securities that are backed by commercial and residential mortgages. There are two main assets that are traded. These are Mortgage Backed Securities (MBS), and Collateralized Mortgage Obligations (CMOs). These two distinct asset classes make the market a very profitable one for many large investment corporations. Thanks to legislative action, most notably when Michael Lewis said, “From the early 1930s legislators had created a portfolio of incentives for Americans to borrow money to buy their homes”(121). These legislative policies made owning your own home something more attractive, because borrowing for it went on to benefit you for tax purposes. In the 1970s, the nation’s mortgage portfolio was booming in growth. As Lewis noted, “the volume of outstanding mortgage loans swelled from $55 billion in 1950 to $700 billion in 1976. In January 1980 that figure became $1.2 trillion, and the mortgage market surpassed the combined United States stock markets as the largest capital market in the world”(122). These are truly shocking numbers. The growth in the industry was completely unforeseen. While there are several similarities between mortgages and bonds, particularly after the development of MBS and CMOs, they are also different. The main difference is that bonds...
Words: 1489 - Pages: 6
...investors, and now JPMorgan may be on the hook Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit's supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a "sack of shit." They were selling investors like Ambac a "sack of shit." News of internal whistleblowers coming forward from Bear's mortgage servicing division, EMC, was first reported by The Atlantic in May of last year. Ex-EMC analysts admitted they were sometimes told to falsify loan-level performance data provided to the ratings agencies who blessed Bear's billion-dollar deals. But according to depositions and documents in the Ambac lawsuit, Bear's misdeeds went even deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally's mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans...
Words: 2490 - Pages: 10
...FIN 430 Assignment 4 (Due on Mar.10th) Name: 1. Which of the following statements regarding mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) is most correct: A. MBSs are created from CMOs. B. Creating CMOs does not reduce the overall prepayment risk of a mortgage passthrough security. C. The prepayment option of an MBS benefits the security holder. D. The cash flows received on the MBS are quite similar to those of a callable coupon bond. B. Creating a CMO can redistribute the prepayment risk among tranches but it does not alter the overall prepayment risk of a mortgage passthrough security. Although MBS and callable bonds both have reinvestment risk, the cash flows from an MBS are different in that mortgage loans are amortizing. 2. Compared to the underlying MBS, a collateralized mortgage obligation (CMO) tranche: A. has less prepayment risk. B. has lower duration. C. may have more or less prepayment risk. D. Allows an investor to select an exact maturity. C. CMOs redistribute prepayment risk and/or the expected repayment term of the underlying MBS among the CMO tranches. If some tranches have less prepayment risk, other must have more. 3. A domestic investor is purchasing foreign bonds. Which of the following statements regarding the exchange rate risk and price movement of the asset is most correct? A. The depreciation of both the asset and the foreign currency benefits the domestic investor. B. The depreciation of the asset and the appreciation...
Words: 923 - Pages: 4
...Study questions: 1. What are the major assumptions and concepts of the structural frame? The structural frame upholds the notion that organizations are judged primarily on and by the proper functioning of those elements which constitute good organization. For the greater part of the 20th century, the assumptions and concepts of scientific management have informed most theories of practice. One of the earliest precursors of scientific management is Max Weber, hired by Frederick the Great to reorganize the Prussian Army, who conceived the “monocratic bureaucracy” as an ideal form that maximized norms of rationality. His model outlined several major features which include: * A fixed division of labor * A hierarchy of offices * A set of rules governing performance * A separation of personal from official property and rights * The use of technical qualifications (not family ties or friendship) for selecting personnel * Employment as primary occupation and long-term career But, if Max Weber “rationalized” the bureaucracy, Frederick Winslow Taylor “hyper-rationalized’ the bureaucracy. Known as the “father” of scientific management”, he sought an objective, scientific mechanism to improve organizational functioning. Based on these two principal intellectual roots, there are six assumptions of the structural frame: * Organizations exist to achieve established goals and objectives * Organizations increase efficiency and enhance...
Words: 560 - Pages: 3
...NBER WORKING PAPER SERIES THE EFFECTS OF QUANTITATIVE EASING ON INTEREST RATES: CHANNELS AND IMPLICATIONS FOR POLICY Arvind Krishnamurthy Annette Vissing-Jorgensen Working Paper 17555 http://www.nber.org/papers/w17555 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2011 We thank Jack Bao, Olivier Blanchard, Greg Duffee, Charlie Evans, Ester Faia, Simon Gilchrist, Robin Greenwood, Monika Piazzesi, David Romer, Thomas Philippon, Tsutomu Watanabe, Justin Wolfers, and participants at seminars and conferences at Brookings, Chicago Fed, Board of Governors of the Federal Reserve, ECB, San Francisco Fed, Princeton University, Northwestern University, CEMFI, University of Pennsylvania (Wharton), Society for Economic Dynamics, NBER Summer Institute, the NAPA Conference on Financial Markets Research, and the European Finance Association for their suggestions. We thank Kevin Crotty and Juan Mendez for research assistance. This paper was prepared for the Brookings Papers on Economic Activity Fall 2011 issue. We have received an honorarium for the presentation of the paper at Brookings. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w17555.ack NBER working papers...
Words: 18319 - Pages: 74
...Economic Crises April 26 Final Exam Short Essays 1. Many economists think that a flexible exchange rate acts like a “shock absorber” in the face of external economic shocks. Explain what this means and why it is (or might be) true. Flexible exchange rates act as a “shock absorber” - Canada’s experience following the Asian Crisis - commodity prices and the Canadian dollar world price of raw materials fell by 30 percent, world is prepared to pay less for our raw materials. This led to dramatic depreciation of CAD. - compare BC and Ontario situations. BC produced a lot of raw materials whose demand fell. The core of manufacturing in Canada is in Ontario (and Quebec) and the resource sectors are largely in the West and very East. When Asian economies go under the tank and reduce their demand for raw materials – the BC economy goes down, they can’t sell stuff to Asia anymore. But the Canadian dollar depreciates by 10 or 15 percent. A depreciating currency helps everybody who is exporting given whatever the price you’re exporting at. Depreciation is a net plus to Ontario, because its machines, etc. gets a bump up in exports. The boost to Ontario offsets the negative to BC somewhat. What happened in 2002-2006 when world demand increased (China and India phenomenon and U.S economic boom) drove up prices, the Canadian dollar appreciated. Ontario was damaged while the East and West of Canada boomed. 2. Describe and explain the connection(s) between the “financial sector”...
Words: 2917 - Pages: 12
...whether the respective markets for the instruments were active or inactive and whether there was a significant decease in the volume and level of activity for the instruments. b. The valuation technique used by FFC c. The classification in the fair value hierarchy for each input into the fair value measurement and how these classifications affects classification in the fair value hierarchy of the entire instrument. We will answer these questions by each instrument separately: First, Collateralized Debt Obligation (CDO) Before September30th, 2010, FFC was in an active market, and it determined the fair value of the CDO by using a market-based valuation technique that relies on inputs such as quotes prices for similar CDO securities and requires only insignificant adjustments. After that, there was a significant decrease in the volume and level of activities and the CDO’s market was not active. Besides, significant adjustments are required to determine fair value as of the measurement date given the lack of recent and relevant transactions. The valuation techniques FFC used for CDO is income approach, because this way could maximize the use of relevant observable input and minimize the use of unobservable inputs. There are two factors FFC mainly considered in the fair value measurement. Frist, FFC considered the implied rate of return on September 30, 2010, which is the last date of active market for CDO. This is the Level 1 input. According to ASC820-10-35-40, Level...
Words: 470 - Pages: 2
...basis points. The pricing difference throws bond-market convention on its head. All things being equal, long-term paper normally commands higher spreads to reflect the greater risk associated with holding investments longer. That started to change in the summer of 2007, when the credit crunch caused bond trading to slow. The benchmark classes of 10-year bonds started trading at slightly tighter spreads than 5-year paper because their larger supply offered more liquidity. But more recently, the gap has ballooned, widening to as much as 400 bp. "The trend has really become noticeable over the past month," one investor said. The new concern about 5-year CMBS is that the timely payoff of bonds depends on the payment streams of commercial mortgages scheduled to mature in the relatively short term, when credit conditions could make it difficult, if not impossible, for borrowers to cover balloon principal payments by refinancing. If a CMBS loan can't be refinanced, a special...
Words: 350 - Pages: 2
...FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman This book is an overview of the Commercial Mortgage-Backed Securities (CMBS) market. The contents of this publication are over eight years in the making and include excerpts of research reports from as early as 1997. In this fifth edition of our primer, we have reorganized the chapters to highlight the different investment options within CMBS. New material since our last edition includes sections on the various types of AAA CMBS classes, total rate of return swaps, floating rate large loan transactions, and an updated version of the commercial mortgage default study. We hope you find this book useful and welcome comments so that we can improve future editions. FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman The Primary Analyst(s) identified above certify that the views expressed in this report accurately reflect his/her/their personal views about the subject securities/instruments/issuers, and no part of his/her/their compensation was, is or will be directly or indirectly related to the specific views or recommendations contained herein. This report has been prepared in accordance with our conflict management policy. The policy describes our organizational and administrative arrangements for the avoidance, management and disclosure...
Words: 93545 - Pages: 375
...basis points. The pricing difference throws bond-market convention on its head. All things being equal, long-term paper normally commands higher spreads to reflect the greater risk associated with holding investments longer. That started to change in the summer of 2007, when the credit crunch caused bond trading to slow. The benchmark classes of 10-year bonds started trading at slightly tighter spreads than 5-year paper because their larger supply offered more liquidity. But more recently, the gap has ballooned, widening to as much as 400 bp. "The trend has really become noticeable over the past month," one investor said. The new concern about 5-year CMBS is that the timely payoff of bonds depends on the payment streams of commercial mortgages scheduled to mature in the relatively short term, when credit conditions could make it difficult, if not impossible, for borrowers to cover balloon principal payments by refinancing. If a CMBS loan can't be refinanced, a special servicer could step in and extend the life of the loan, in turn delaying the return of principal to...
Words: 631 - Pages: 3
...securitization of real estate? Defination of securitization Securitisation is the issuance of debt certificates that are secured by cash flows from different kinds of assets. The issued securities are called Asset-Backed Securities (ABS). In essence a pool of payment claims are packaged and are made to securities in order to create a secondary market for the underlying receivables or other various illiquid assets. Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS). Therefore, securitization of real estate is the pooling of real estate assets as underlying assets securing a debt, which is issued to investors in return for cash flows from the underlying real estate assets. The illiquid real estate assets that generate a constant cash flow are formed into a tradable security and are floated on the debt market. Securitization process In its most basic form, the process involves two steps. 1. A company with loans or other income-producing assets—the...
Words: 2716 - Pages: 11
...According to Forbes, collateralized debt obligations are “investment-grade security backed by a pool of various other securities that can be made up of any type of debt, in the form of bonds or loans”. This process of “pooling in debt to reduce risk and raise returns” is known as collateralized debt obligation. The process of splitting the debt into different tranches to assign the payment priority and interest rate is known as securitization. Investment banks can buy mortgages and assign them to certain entities. They can now sell shares of these mortgages at a certain share price and yield rate. There will always be different investors; there are those who are risk averse and find the shares to be too risky, and those who can afford the higher risk and find the yield to be too low. To accommodate both ends, these shares are sliced into different classes also known as tranches. Since mortgage backed securities all paid the same amount, the class will determine who gets paid first. The higher-rated tranche will have a lower interest rate for lower risk, and the lowest-rated tranche which may even be a junk rating will have a higher interest rate but at the cost of high risk because they may not get paid. It is widely believed that these financial instruments played a big role in the 2008 financial crisis. One problem about collateralized debt obligations is that sometimes they are very complex made up of so many things that nobody really understands what they are and...
Words: 277 - Pages: 2
