1. Mortgage backed securitites
András Bohák

2. MBS I. Mortgage-backed securities Agency or non-agency
Fix or adjustable interest (ARM – adjustable rate mortgage)
Balloon
Pass-through or structured

3. MBS II. MBS 30 Year Gold PC cusip 3128KDM28 Freddie Mac Loan
Originator / Servicer
Loan
Loan
Loan
Originator / Servicer
Securitizer
MBS
Loan
Loan
30 Year Gold PC
cusip KDM28
Loan
Originator / Servicer
Loan
Freddie Mac
Bank of America
Source: Miklós Vörös, 2011.

4. Prepayment In the US, partial or full prepayment is possible and free.
This is more and more true in the EU.
Main prepayment reasons:
Selling the property („turnover”)
Falling rates („refinancing”)
And in some cases, default too
Because of insurance, a default looks like a prepayment to the investor

5. MBS III.
Pass-throughs are the easiest, it is only about diversification
RMBS: residential
CMBS: commercial
Sturctured: collateralized mortgage obligation (CMO)
Details later

6. Huge market (over 5 trillion USD)
MBS IV.
SMBS: Stripped MBS
IO – Interest only
PO – Principal
Question: How does the value of these react to changes in prepayment?
If prepayment increases, PO ↑ and IO ↓ ↓
Huge market (over 5 trillion USD)

7. Fannie Mae, Freddie Mac Fannie Mae, Freddie Mac
Fannie was founded in 1938 as part of the New Deal
Privatized in 1968
Goal: provide liquidity to the market by securitization
Buy fresh loans from originators
Sell it to investors
Add guarantee for a fee
Government-sponsored Enterprise
Freddie: from 1970, against monopoly
Ginnie Mae is the third, it was always public
Full faith and credit of the US

8. Case-Shiller index USA real estate index Since 1987
RSR – repeated sales regression
Indexing in an illiquid market is hard. With RSR, only double sales enter the index.
Monthly data, now run by S&P. It has a two month delay.

9. HPI index as of today

10. CMO
Risks of loans
Interest rate risk
Prepayment risk
Reinvestment risk
Esetleg default risk
The aim of a CMO is to redistribute this risks among investors
BEWARE: total risk remains the same, we can just split it differently

11. Overview

13. Everything is AAA?