1、Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-1Chapter 12 Collaterized Mortgage Obligations and Stripped Mortgage-Backed Securities Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-2Learning ObjectivesAfter reading this chapter,you will understand what a mortga
2、ge is why and how an agency collateralized mortgage obligation is created what is meant by REMIC and why CMOs are referred to as REMICs or REMIC structures what a sequential-pay CMO is how the average life of a sequential-pay CMO compares to that of the collateral from which it is created what an ac
3、crual tranche is and its effect on the average life of sequential-pay tranches in the CMO structure how a floater and an inverse floater are created from a CMO trancheCopyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-3Learning Objectives(continued)After reading this chapter,you will
4、 understand what a planned amortization class tranche is and how it is created how the prepayment protection for a planned amortization class changes over time what a support tranche is and the substantial prepayment risk to which it exposes investors what a support bond with a schedule is what a no
5、tional IO is and how it is created how agency stripped mortgage-backed securities are created the various types of agency stripped mortgage-backed securities the investment characteristics of agency stripped mortgage-backed securitiesCopyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12
6、-4Agency Collateralized Mortgage Obligations Collateralized mortgage obligations(CMOs)are bond classes created by redirecting the cash flows of mortgage-related products so as to mitigate prepayment risk.The mere creation of a CMO cannot eliminate prepayment risk;it can only transfer the various for
7、ms of this risk among different classes of bondholders.The bond classes created are commonly referred to as tranches.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-5Agency Collateralized Mortgage Obligations(continued)Sequential-Pay Tranches The first CMO was created in 1983 and
8、was structured so that each class of bond would be retired sequentially.o Such structures are referred to as sequential-pay CMOs.A CMO is created by redistributing the cash flow(interest and principal)to the different tranches based on payment rules.Copyright 2010 Pearson Education,Inc.Publishing as
9、 Prentice Hall12-6Exhibit 12-1 FJF-01:Hypothetical Four-Tranche Sequential-Pay StructureaTranchePar AmountCoupon Rate(%)A$194,500,0007.5B36,000,0007.5C96,500,0007.5D73,000,0007.5$400,000,000aPayment rules:1.For payment of periodic coupon interest:Disburse periodic coupon interest to each tranche on
10、the basis of the amount of principal outstanding at the beginning of the period.2.For disbursement of principal payments:Disburse principal payments to tranche A until it is paid off completely.After tranche A is paid off completely,disburse principal payments to tranche B until it is paid off compl
11、etely.After tranche B is paid off completely,disburse principal payments to tranche C until it is paid off completely.After tranche C is paid off completely,disburse principal payments to tranche D until it is paid off completely.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-7Ag
12、ency Collateralized Mortgage Obligations(continued)Sequential-Pay Tranches Each tranche receives periodic coupon interest payments based on the amount of the outstanding balance at the beginning of the month.oA tranche is not entitled to receive principal until the entire principal of the preceding
13、tranche has been paid off.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-8Agency Collateralized Mortgage Obligations(continued)Sequential-Pay Tranches There is considerable variability of the average life for the tranches.Exhibit 12-3(see Overhead 12-9)reports the average life of
14、 the collateral and the four tranches assuming different prepayment speeds.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-9Exhibit 12-3 Average Life for the Collateral and the Four Tranches of FJF-01PrepaymentSpeed(PSA)Average Life forCollateralTranche ATranche BTranche CTranche
15、D5015.117.4815.9821.0227.2410011.664.9010.8615.7824.581658.763.487.4911.1920.272007.683.056.429.6018.113005.632.324.646.8113.364004.441.943.705.3110.345003.681.693.124.388.356003.161.512.743.756.967002.781.382.473.305.95Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-10Agency Coll
16、ateralized Mortgage Obligations(continued)oThere is some protection provided for each tranche against prepayment risk.oShorter-term tranche is protected against extension risk.Other tranches are provided protection against contraction risk.Copyright 2010 Pearson Education,Inc.Publishing as Prentice
17、Hall12-11Agency Collateralized Mortgage Obligations(continued)o Example,page 279Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-12Agency Collateralized Mortgage Obligations(continued)Accrual Bonds In many sequential-pay CMO structures,at least one tranche does not receive current
18、interest.Instead,the interest for that tranche would accrue and be added to the principal balance.Such a bond class is commonly referred to as an accrual tranche or a Z bond(because the bond is similar to a zero-coupon bond).The interest that would have been paid to the accrual bond class is then us
19、ed to speed up the pay down of the principal balance of earlier bond classes.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-13Exhibit 12-4 FJF-02:Hypothetical Four-Tranche Sequential-Pay Structure with an Accrual Bond ClassaTranchePar AmountCoupon Rate(%)A$194,500,0007.5B36,000,0
20、007.5C96,500,0007.5Z(accrual)73,000,0007.5$400,000,000aPayment rules:1.For payment of periodic coupon interest:Disburse periodic coupon interest to tranches A,B,and C on the basis of the amount of principal outstanding at the beginning of the period.For tranche Z,accrue the interest based on the pri
21、ncipal plus accrued interest in the preceding period.The interest for tranche Z is to be paid to the earlier tranches as a principal pay down.2.For disbursement of principal payments:Disburse principal payments to tranche A until it is completely paid off.After tranche A is paid off completely,disbu
22、rse principal payments to tranche B until it is paid off completely.After tranche B is paid off completely,disburse principal payments to tranche C until it is paid off completely.After tranche C is paid off completely,disburse principal payments to tranche Z,until the original principal balance plu
23、s accrued interest is paid off completely.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-14Agency Collateralized Mortgage Obligations(continued)The average lives for tranches A,B,and C are shorter in FJF-02 than in FJF-01 because of the inclusion of the accrual bond.For example,a
24、t 165 PSA,the average lives are as follows:The reason for the shortening of the nonaccrual tranches is that the interest that would be paid to the accrual bond is being allocated to the other tranches.Tranche Z in FJF-02 will have a longer average life than that of tranche D in FJF-01.StructureFJF-0
25、2Tranche B2.90 7.87Tranche ATranche C5.86FJF-013.487.4911.19Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-15Agency Collateralized Mortgage Obligations(continued)Floating-Rate Tranches Floating-rate tranches can be created from fixed-rate tranches by creating a floater and an inv
26、erse floater.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-16Exhibit 12-6 FJF-03:Hypothetical Five-Tranche Sequential-Pay Structure with Floater,Inverse Floater,and Accrual Bond ClassTranchePar AmountCoupon Rate(%)A$194,500,0007.5B36,000,0007.5FL72,375,0001-month LIBOR+0.50IFL24
27、,125,00028.50 3 (1-month LIBOR)Z(accrual)73,000,0007.5$400,000,000Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-17Agency Collateralized Mortgage Obligations(continued)Floating-Rate Tranches Unlike a floating-rate note in the corporate bond market,whose principal is unchanged ove
28、r the life of the instrument,the floaters principal balance declines over time as principal payments are made.The principal payments to the floater are determined by the principal payments from the tranche from which the floater is created.Copyright 2010 Pearson Education,Inc.Publishing as Prentice
29、Hall12-18Agency Collateralized Mortgage Obligations(continued)Floating-Rate Tranches Inverse floaters with a wide variety of coupon leverages are available in the market.Participants refer to:i.low-leverage inverse floaters as those with a coupon leverage between 0.5 and 2.1ii.medium-leverage as tho
30、se with a coupon leverage higher than 2.1 but not exceeding 4.5iii.high-leverage as those with a coupon leverage higher than 4.5.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-19Agency Collateralized Mortgage Obligations(continued)The CMO innovations attracted many institutional.
31、In March 1987,the M.D.C.Mortgage Funding Corporation CMO Series 0 included a class of bonds referred to as stabilized mortgage reduction term(SMRT)bonds.Another class in its CMO Series P was referred to as planned amortization class(PAC)bonds.The Oxford Acceptance Corporation III Series C CMOs inclu
32、ded a class of bonds referred to as a planned redemption obligation(PRO)bonds.The characteristic common to these three bonds is that if the prepayments are within a specified range,the cash flow pattern is known.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-20Agency Collateraliz
33、ed Mortgage Obligations(continued)The greater predictability of the cash flow for classes of PAC bonds occurs because there is a principal repayment schedule that must be satisfied.The greater certainty of the cash flow for the PAC bonds comes at the expense of the non-PAC classes,called support or
34、companion bonds.It is these bonds that absorb the prepayment risk.Because PAC bonds have protection against both extension risk and contraction risk,they are said to provide two-sided prepayment protection.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-21Exhibit 12-8 FJF-04:CMO S
35、tructure with One PAC Bond and One Support BondaTranchePar AmountCoupon Rate(%)P(Pac)$243,800,0007.5S(Support)156,200,0007.5$400,000,000aPayment rules:1.For payment of periodic coupon interest:Disburse periodic coupon interest to each tranche on the basis of the amount of principal outstanding at th
36、e beginning of the period.2.For disbursement of principal payments:Disburse principal payments to tranche P based on its schedule of principal repayments.Tranche P has priority with respect to current and future principal payments to satisfy the schedule.Any excess principal payments in a month over
37、 the amount necessary to satisfy the schedule for tranche P are paid to tranche S.When tranche S is paid off completely,all principal payments are to be made to tranche P regardless of the schedule.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-22Agency Collateralized Mortgage Ob
38、ligations(continued)Exhibit 12-9(see Overhead 12-23)reports the average life for the PAC bond and the support bond in FJF-04 assuming various actual prepayment speeds.Notice that between 90 PSA and 300 PSA,the average life for the PAC bond is stable at 7.26 years.Copyright 2010 Pearson Education,Inc
39、.Publishing as Prentice Hall12-23Exhibit 12-9 Average Life for Pac Bond and Support Bond in FJF-04 Assuming Various Prepayment SpeedsPrepaymentRate(PSA)PAC Bond(P)Support Bond(S)1015.9727.26509.4424.00907.2618.561007.2618.561507.2612.571657.2611.162007.268.382507.265.373007.263.133506.562.514005.922
40、.174505.381.945004.931.777003.701.37Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-24Agency Collateralized Mortgage Obligations(continued)Creating a Series of PAC Bonds Most CMO PAC structures have more than one class of PAC bonds.The total par value of the six PAC bonds is equal
41、 to$243.8 million,which is the amount of the single PAC bond in FJF-04.Copyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-25Exhibit 12-10 FJF-05:CMO Structure with Six PAC Bonds and One Support BondaTranchePar AmountCoupon Rate(%)P-A$85,000,0007.5P-B 8,000,0007.5P-C 35,000,0007.5P-D
42、45,000,0007.5P-E 40,000,0007.5P-F 30,800,0007.5S 156,200,0007.5$400,000,000aPayment rules:1.For payment of periodic coupon interest:Disburse periodic coupon interest to each tranche on the basis of the amount of principal outstanding at the beginning of the period.2.For disbursement of principal pay
43、ments:Disburse principal payments to tranches P-A to P-F based on their respective schedules of principal repayments.Tranche P-A has priority with respect to current and future principal payments to satisfy the schedule.Any excess principal payments in a month over the amount necessary to satisfy th
44、e schedule for tranche P-A are paid to tranche S.When tranche P-A is paid off completely,tranche P-B has priority,then tranche P-C,and so on.When tranche S is paid off completely,all principal payments are to be made to the remaining PAC tranches in order of priority regardless of the schedule.Copyr
45、ight 2010 Pearson Education,Inc.Publishing as Prentice Hall12-26Agency Collateralized Mortgage Obligations(continued)Creating a Series of PAC BondsFrom a PAC bond in FJF-04 with an average life of 7.26,we have created six bonds with an average life as short as 2.58 years(P-A)and as long as 16.92 yea
46、rs(P-F)if prepayments stay within 90 PSA and 300 PSA.Whereas the initial collar may be 90 to 300 PSA,the effective collar is wider for the shorter PAC tranches.Exhibit 12-12(see Overhead 12-28)shows the effective collar for the six PAC tranches in FJF-04.Copyright 2010 Pearson Education,Inc.Publishi
47、ng as Prentice Hall12-27Exhibit 12-11 Average Life for the Six PAC Bonds in FJF-05 Assuming Various Prepayment SpeedsPrepaymentRate(PSA)PAC BondsP-AP-BP-CP-DP-EP-F08.4614.6116.4919.4121.9123.76503.586.828.3611.3014.5018.20902.584.725.787.8910.8316.921002.584.725.787.8910.8316.921502.584.725.787.8910
48、.8316.921652.584.725.787.8910.8316.922002.584.725.787.8910.8316.922502.584.725.787.8910.8316.923002.584.725.787.8910.8316.923502.584.725.496.959.2414.914002.574.374.916.178.3313.214502.503.974.445.567.4511.815002.403.654.075.066.7410.657002.062.823.103.754.887.51Copyright 2010 Pearson Education,Inc.
49、Publishing as Prentice Hall12-28Exhibit 12-12 Effective Collars for Each Pac Tranche in FJF-04Amount of Support Bonds:$156.2 MillionTrancheEffective CollarP-A90450 PSAP-B90350 PSAP-C90300 PSAP-D90300 PSAP-E90300 PSAP-F90300 PSACopyright 2010 Pearson Education,Inc.Publishing as Prentice Hall12-29Copy
50、right 2009 Pearson Education,nc.Publishing as Prentice HallAgency Collateralized Mortgage Obligations(continued)PAC Window The length of time over which scheduled principal repayments are made is referred to as the window.A PAC window can be wide or narrow.The narrower a PAC window,the more it resem
