Investment Operations

Mortgage-Backed Securities (MBS) Fundamentals

Categories Introductory

Course Instructor

Course Level

Beginner

Certification

Certificate

Delivery

Via Zoom

Hours (EST)

9:00 am - 1:00 pm​

Description

Date: TBD

The MBS virtual course will familiarize participants with a variety of MBS market fundamentals to facilitate the later discussion of the different types of securities. The program commences with an overview of the current MBS market, identifying the distinguishing characteristics of the market and securities traded therein as well as significant trends and events whose impacts are visible in the market today. A key element of that discussion will be the US mortgage agencies, (FNMA, FHLMC and GNMA), their role in the operation of the market and how it has evolved over time. The course will address the other major categories of MBS: agency and non-agency collateralized mortgage obligations (CMOs), commercial mortgage-backed securities (CMBS), agency multi-family securitizations. As with the previous day’s agency pass-through coverage, the presentation will concentrate on investment cash flows and risks.

Who Should Attend

The seminar is useful for anyone whose duties entail some exposure to the mortgage-backed securities business.

  1. Those working in areas supporting CMBS trading or sales as well as middle and back-office areas such as clearance and settlement, compliance, financial control, information technology, portfolio administration or marketing.
  2. Those working in areas supporting non-agency MBS trading or sales as well as middle- and back-office areas such as clearance and settlement, compliance, financial control, information technology, portfolio administration or marketing.
  3. The program would be especially helpful to those working in areas supporting agency pass through trading or sales as well as middle and back-office areas such as clearance and settlement, compliance, financial control, information technology, portfolio administration or marketing.

Prerequisite: None

Day 1

Overview of the Commercial Mortgage-Backed Securities (CMBS) Market

  • Basics of CMBS
  • Evolution of CMBS market
  • Securitization of commercial mortgages
  • Comparison of commercial mortgages to residential mortgages
  • CMBS pools compared to agency residential MBS pools
  • Payout structures

Commercial Mortgage Loans

  • Commercial property types and their investment characteristics
  • Commercial mortgage contracts
  • Mortgage level prepayment/call protection

Commercial Mortgage Securitizations

  • Economic drivers of CMBS market
  • CMBS collateral pools (asset portfolios)
  • Credit enhancements
  • Tranche structures
  • CMBS servicers and their roles

CMBS Cash Flows and Credit Loss Allocations

  • CMBS waterfalls: allocation of cash flows and credit losses
  • Pass-through versus tranched structures
  • Credit tranching and time tranching
  • Principal and interest tranches and interest only tranches
  • Average life uncertainty: prepayment risk and extension risk

Day 2

Introduction to Multi-Class (Tranched) Payout Structures

  • Prioritization of collateral cash flow distributions
  • Tranche interest rate determinants
  • Collateral pool risk allocation (why collateral WAC > WAC of tranches)
  • Excess spread sold as IO strips and/or used to fund credit enhancements

Agency Collateralized Mortgage Obligations

  • General characteristics
  • Debt tranches credit worthiness
  • Principal returned on a pure time based priority
  • Collateral: mortgage pool or pool comprised of other agency MBS
  • Sequential pay tranches
  • Z-bond (accrual bond) tranches
  • Planned amortization class (PAC bond) tranches
  • Targeted amortization class (TAC bond) tranches and reverse TACs
  • Very accurately defined maturity (VADM) tranches
  • Floating rate tranches (floaters)
  • Inverse floating rate tranches (inverse floaters)
  • Interaction among tranche types

Non-Agency Collateralized Mortgage Obligations

  • General characteristics, differences and similarities to agency CMOs
  • Common tranche types
  • Cash flow waterfall, prioritization of cash distributions and credit loss allocations
  • Smaller deal size, fewer tranches and few tranche types versus agencies
  • Credit enhancements, external and internal
  • Shifting interest and other triggers altering cash flow prioritization
  • Implication of collateral pool assets (e.g., jumbo versus less than prime mortgages)

Day 3

Overview of the US Mortgage-Backed Securities Market

  • Characteristics of MBS and MBS market
  • US mortgage agencies: FNMA, FHLMC and GNMA
  • Types of loans securitized and agency guarantees

Mortgage Loans

  • Nature of mortgage loans
  • Loan repayment terms: fully amortizing, balloon and interest only
  • Fixed versus floating interest rate loans
  • Property types: single-family residential, multi-family residential and commercial
  • Purchase money versus refinancing mortgages
  • Conforming and non-conforming mortgages

Agency Single-Family Residential Mortgage Pass-Throughs

  • Acquisition of loans/loan securitization
  • Investors’ securities: claim (equity interest) on a trust account
  • Tracking cash flows from mortgagors to investors
  • Investors cash flows: principal distribution and interest on outstanding principal Characteristics of loan pools
  • Weighted average coupon (WAC) and pass-through rate
  • Risks of agency pass throughs
  • Pooling of pass-through securities: giants, megas and platinum securities

Prepayment Risk of Single-Family Residential Securitizations

  • Prepayment risk (embedded optionality or uncertain average life)
  • Investors short option position and asymmetric impact of prepayment rate changes
  • Factors impacting prepayment rates (variables in prepayment models)
  • Use of average life and its uncertainty in evaluating agency pass throughs

Trading and Settlement of Agency Pass-Through Securities

  • Specified trading and TBA (To Be Announced) trading
  • Uses of TBA trades (beyond buying to take delivery)
  • TBA trade pricing: cost of carry forward pricing and impact of positive/negative carry

Summary & Questions

$1,495.00

In-House Training

Custom Training can help you achieve your corporate training goals while staying on budget and focusing the content on the needs of your group. Email your questions regarding corporate training to training@investmentoperations.net.

2023 Training Calendar

Training Catalogue

Course Instructor

Course Level

Beginner

Certification

Certificate

Delivery

Via Zoom

Hours (EST)

9:00 am - 1:00 pm​

$1,495.00

Description

Date: TBD

The MBS virtual course will familiarize participants with a variety of MBS market fundamentals to facilitate the later discussion of the different types of securities. The program commences with an overview of the current MBS market, identifying the distinguishing characteristics of the market and securities traded therein as well as significant trends and events whose impacts are visible in the market today. A key element of that discussion will be the US mortgage agencies, (FNMA, FHLMC and GNMA), their role in the operation of the market and how it has evolved over time. The course will address the other major categories of MBS: agency and non-agency collateralized mortgage obligations (CMOs), commercial mortgage-backed securities (CMBS), agency multi-family securitizations. As with the previous day’s agency pass-through coverage, the presentation will concentrate on investment cash flows and risks.

Who Should Attend

The seminar is useful for anyone whose duties entail some exposure to the mortgage-backed securities business.

  1. Those working in areas supporting CMBS trading or sales as well as middle and back-office areas such as clearance and settlement, compliance, financial control, information technology, portfolio administration or marketing.
  2. Those working in areas supporting non-agency MBS trading or sales as well as middle- and back-office areas such as clearance and settlement, compliance, financial control, information technology, portfolio administration or marketing.
  3. The program would be especially helpful to those working in areas supporting agency pass through trading or sales as well as middle and back-office areas such as clearance and settlement, compliance, financial control, information technology, portfolio administration or marketing.

Prerequisite: None

Day 1

Overview of the Commercial Mortgage-Backed Securities (CMBS) Market

  • Basics of CMBS
  • Evolution of CMBS market
  • Securitization of commercial mortgages
  • Comparison of commercial mortgages to residential mortgages
  • CMBS pools compared to agency residential MBS pools
  • Payout structures

Commercial Mortgage Loans

  • Commercial property types and their investment characteristics
  • Commercial mortgage contracts
  • Mortgage level prepayment/call protection

Commercial Mortgage Securitizations

  • Economic drivers of CMBS market
  • CMBS collateral pools (asset portfolios)
  • Credit enhancements
  • Tranche structures
  • CMBS servicers and their roles

CMBS Cash Flows and Credit Loss Allocations

  • CMBS waterfalls: allocation of cash flows and credit losses
  • Pass-through versus tranched structures
  • Credit tranching and time tranching
  • Principal and interest tranches and interest only tranches
  • Average life uncertainty: prepayment risk and extension risk

Day 2

Introduction to Multi-Class (Tranched) Payout Structures

  • Prioritization of collateral cash flow distributions
  • Tranche interest rate determinants
  • Collateral pool risk allocation (why collateral WAC > WAC of tranches)
  • Excess spread sold as IO strips and/or used to fund credit enhancements

Agency Collateralized Mortgage Obligations

  • General characteristics
  • Debt tranches credit worthiness
  • Principal returned on a pure time based priority
  • Collateral: mortgage pool or pool comprised of other agency MBS
  • Sequential pay tranches
  • Z-bond (accrual bond) tranches
  • Planned amortization class (PAC bond) tranches
  • Targeted amortization class (TAC bond) tranches and reverse TACs
  • Very accurately defined maturity (VADM) tranches
  • Floating rate tranches (floaters)
  • Inverse floating rate tranches (inverse floaters)
  • Interaction among tranche types

Non-Agency Collateralized Mortgage Obligations

  • General characteristics, differences and similarities to agency CMOs
  • Common tranche types
  • Cash flow waterfall, prioritization of cash distributions and credit loss allocations
  • Smaller deal size, fewer tranches and few tranche types versus agencies
  • Credit enhancements, external and internal
  • Shifting interest and other triggers altering cash flow prioritization
  • Implication of collateral pool assets (e.g., jumbo versus less than prime mortgages)

Day 3

Overview of the US Mortgage-Backed Securities Market

  • Characteristics of MBS and MBS market
  • US mortgage agencies: FNMA, FHLMC and GNMA
  • Types of loans securitized and agency guarantees

Mortgage Loans

  • Nature of mortgage loans
  • Loan repayment terms: fully amortizing, balloon and interest only
  • Fixed versus floating interest rate loans
  • Property types: single-family residential, multi-family residential and commercial
  • Purchase money versus refinancing mortgages
  • Conforming and non-conforming mortgages

Agency Single-Family Residential Mortgage Pass-Throughs

  • Acquisition of loans/loan securitization
  • Investors’ securities: claim (equity interest) on a trust account
  • Tracking cash flows from mortgagors to investors
  • Investors cash flows: principal distribution and interest on outstanding principal Characteristics of loan pools
  • Weighted average coupon (WAC) and pass-through rate
  • Risks of agency pass throughs
  • Pooling of pass-through securities: giants, megas and platinum securities

Prepayment Risk of Single-Family Residential Securitizations

  • Prepayment risk (embedded optionality or uncertain average life)
  • Investors short option position and asymmetric impact of prepayment rate changes
  • Factors impacting prepayment rates (variables in prepayment models)
  • Use of average life and its uncertainty in evaluating agency pass throughs

Trading and Settlement of Agency Pass-Through Securities

  • Specified trading and TBA (To Be Announced) trading
  • Uses of TBA trades (beyond buying to take delivery)
  • TBA trade pricing: cost of carry forward pricing and impact of positive/negative carry

Summary & Questions

In-House Training

Custom Training can help you achieve your corporate training goals while staying on budget and focusing the content on the needs of your group. Email your questions regarding corporate training to training@investmentoperations.net.

2023 Training Calendar

Training Catalogue

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