Mortgage Back Securities
Finance Club – Sales & Trading
Presentation Series
Anthony J. Ross, MBA2
What are Mortgage Back Securities?
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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
Anthony J. Ross, MBA2
Prepayment Structure “101”
Scheduled Cash Flows for a 30Year Fixed-Rate Mortgage
Possible Cash Flows of a
Mortgage Pass-Through
Three Sequential Pay Bonds
Anthony J. Ross, MBA2
Historical Context
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“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
Anthony J. Ross, MBA2
Current Landscape
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Market Conditions
Risks
Wall Street Competitive Advantages
Opportunities for Expansion
Anthony J. Ross, MBA2
Market Conditions –
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“A Consumer Focus”
Macro Factors
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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
Anthony J. Ross, MBA2
Non-Agency Issuance
Rank
Issuer
1
Countrywide
2
Lehman Brothers
3
WAMU
4
Ameriquest
5
Wels Fargp
$
$
$
$
$
2005
71,255
38,042
30,843
28,262
26,424
$
$
$
$
$
2004
Change Deals Mkt Share
51,064
39.5%
84
13%
28,749
32.3%
53
7%
20,054
53.8%
19
6%
18,815
50.2%
28
5%
11,505 129.7%
26
5%
Non-Agency Market Share
Non-Agency MBS Issuance
Q105 - Q205
YTD
Prime
5.7%
28.6%
SubPrime
23.3%
44%
Alt-A
33.4%
124.1%
Scratch & Dent
9.8%
-34.2%
RE-MBS
293.1%
128.5%
Seconds
-5.0%
1.9%
Other
-2.2%
1.1%
W ells Fargo,
Total
5%
Country w ide,
A meriquest,
13%
5%
W A MU, 6%
Lehman
Brothers, 7%
Country w ide
Lehman Brothers
A meriquest
W ells Fargo
Anthony J. Ross, MBA2
W A MU
23.4%
48.7%
Risks
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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
Anthony J. Ross, MBA2
Wall Street Competitive Advantages
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Vertical Integration
Origination
Local/National
Originators
Anthony J. Ross, MBA2
Securitization
Client Relationships
Capital Markets
Competition
MBS Research
Opportunities for Expansion
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Origination
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Expand product mix into deeper
credit quality
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Alt B
Credit solutions
Move back from hybrids to fixed
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Delinquency Business Platform
Agency & Non-Agency
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Increased Demand in Asia
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New Structures – Combine 2-3 Rich
bonds
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Derivatives - Floaters
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Anthony J. Ross, MBA2
Questions & References
Websites
www.investinginbonds.com
Books
“The Mortgage Backed Securities Workbook” by Davidson & Herskovitz
“Handbook of Mortgage Backed Securities” by Frank J Fabozzi
Anthony J. Ross, MBA2