Anand K. Bhattacharya & William S. Berliner 
Mortgage-Backed Securities 
Products, Structuring, and Analytical Techniques

An in-depth look at the latest innovations in mortgage-backed
securities

The largest sector of the fixed-income market is the mortgage
market. Understanding this market is critical for portfolio
managers, as well as issuers who must be familiar with how these
securities are structured. Mortgage-Backed Securities is a
timely guide to the investment characteristics, creation, and
analysis of residential real estate-backed securities. Each chapter
contains cutting-edge information for investors, traders, and other
professionals involved in this market, including discussions of
structuring mortgage products-such as agency CMOs and new types of
mortgages-and an in-depth explanation of the concept of
option-adjusted spreads and other analytical concepts used to
assess relative value.

Table of Content

Preface.

About the Authors.

PART ONE: Introduction to Mortgage and MBS Markets.

Chapter 1: Overview of Mortgages and the Consumer Mortgage
Market.

Overview of Mortgages.

Mortgage Loan Mechanics.

Risks Associated with Mortgages and Mortgage Products.

Chapter 2: Overview of the Mortgage-Backed Securities
Market.

Creating Different Types of MBS.

MBS Trading.

The Role of the MBS Markets in Generating Consumer Lending
Rates.

Cash Flow Structuring.

PART TWO: Prepayment and Default Metrics and
Behavior.

Chapter 3: Measurement of Prepayments and Defaults.

Prepayment Convention Terminology.

Delinquency, Default, and Loss Terminology.

Chapter 4: Prepayment Behavior and Performance.

Prepayment Behavior.

Drivers of Prepayment Activity.

Additional Factors Affecting Prepayment Speeds.

Prepayment Behavior of ‘Nonfixed-Payment’
Products.

Summary.

PART THREE: Structuring.

Chapter 5: Introduction to MBS Structuring
Techniques.

Underlying Logic in Structuring Cash Flows.

Structuring Different Mortgage Products.

Fundamentals of Structuring CMOs.

Chapter 6: Fundamental MBS Structuring Techniques: Divisions
of Principal.

Time Tranching.

Planned Amortization Classes (PACs) and the PAC/Support
Structure.

Targeted Amortization Class Bonds.

Z-Bonds and Accretion-Directed Tranches.

A Simple Structuring Example.

Chapter 7: Fundamental MBS Structuring Techniques: Divisions
of Interest.

Coupon Stripping and Boosting.

Floater/Inverse Floater Combinations.

Two-Tiered Index Bonds (TTIBs).

Excess Servicing IOs.

Chapter 8: Structuring Private Label CMOs.

Private Label Credit Enhancement.

Private Label Senior Structuring Variations.

Chapter 9: The Structuring of Mortgage ABS Deals.

Fundamentals of ABS Structures.

Credit Enhancement for Mortgage ABS Deals.

Factors Influencing the Credit Structure of Deals.

Additional Structuring Issues and Developments.

PART FOUR: Valuation and Analysis.

Chapter 10: Techniques for Valuing MBS.

Static Cash Flow Yield Analysis.

Zero-Volatility Spread.

Valuation Using Monte Carlo Simulation and OAS Analysis.

Total Return Analysis.

Chapter 11: Measuring MBS Interest Rate Risk.

Duration.

Convexity.

Yield Curve Risk.

Other Risk Measures.

Illustration of Risk Measures.

Summary.

Chapter 12: Evaluating Senior MBS and CMOs.

Yield and Spread Matrices.

Monte Carlo and OAS Analysis.

Total Return Analysis.

Comparing the Analysis of Agency and Private Label Tranches.

Evaluating Inverse Floaters.

Summary.

APPENDIX: An Option-Theoretic Approach to Valuing
MBS.

Option-Theoretic Models for Valuing MBS.

An Option-Based Prepayment Model for Mortgages.

Valuation of Mortgages.

A Closer Look at Leapers and Laggards.

Valuation of MBS.

Summary.

INDEX.

About the author

Frank J. Fabozzi is Professor in the Practice of Finance in
the School of Management at Yale University. Prior to joining the
Yale faculty, he was a Visiting Professor of Finance in the Sloan
School at MIT. He is a Fellow of the International Center for
Finance at Yale University and on the Advisory Council for the
Department of Operations Research and Financial Engineering at
Princeton University. Professor Fabozzi is the editor of the
Journal of Portfolio Management and an associate editor of
the Journal of Fixed Income. He earned a doctorate in
economics from the City University of New York in 1972. In 2002 was
inducted into the Fixed Income Analysts Society’s Hall of
Fame and is the 2007 recipient of the C. Stewart Sheppard Award
given by the CFA Institute. He earned the designation of Chartered
Financial Analyst and Certified Public Accountant. He has authored
and edited numerous books in finance.

Anand K. Bhattacharya is a Managing Director at
Countrywide Securities Corporation (CSC), a wholly owned affiliate
of Countrywide Financial Corporation. He joined CSC in 1999, where
he is responsible for the management of fixed income research and
strategies. Immediately prior to joining Countrywide, he was
Managing Director responsible for capital markets, risk management
and portfolio management oversight at Imperial Credit Industries
Inc (ICII) from March 1998 to January 1999. Prior to his employment
at ICII, Dr. Bhattacharya held positions at Prudential Securities
Inc. from 1990 to 1998 with the most recent position as Managing
Director, Global Head of Fixed Income Research. His prior
employment includes positions in fixed income research and product
management at Merrill Lynch Capital Markets, Franklin Savings
Association and its subsidiaries and Security Pacific Merchant
Bank. Dr. Bhattacharya has written extensively in various facets of
fixed income analysis and portfolio management. He has authored or
coauthored over 65 publications in various academic and
professional journals and industry handbooks. He holds a Ph.D. in
Finance and Quantitative Methods from Arizona State University.

William S. Berliner is Executive Vice President in charge
of the Mortgage Strategies group at Countrywide Securities
Corporation. In this capacity, he oversees the generation of
relative value analysis and strategies, and writes and edits many
of the firm’s reports and publications. He began his career
in the Government Operations Department of Bear, Stearns and Co. in
1985. He moved to the Mortgage trading desk in 1987 as a clerk and
joined the CMO desk in 1989. He worked on the CMO desk at Bear
until 1993, when he left to join Nikko Securities, where he
eventually ran CMO trading. He joined Countrywide as a trader in
1996 and moved to the Research Department in early 1998. Mr.
Berliner has a BA in Interpersonal Communications from Rutgers
College and an MBA in Finance from the Rutgers Graduate School of
Business.