Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition

CHAPTER 13

Analysis of Nonagency MBS

While the evaluation of private-label mortgage-backed securities utilizes many of the techniques discussed in Chapter 12, the need to incorporate credit risk and adjust returns for expected principal losses requires additional analysis and metrics. The fact that the credit risk in these securities is not assumed by the government, either explicitly or implicitly, forces investors to evaluate and judge both the timing of the return of principal as well as the amount of principal, if any, that investors can expect to receive. Moreover, credit analysis has moved up what is called the credit stack. As we noted in Chapter 12, a major change stemming from the mortgage crisis is that investors can no longer assume that senior private-label mortgage-backed securities have virtually the same credit risk as agency MBS. Any bond that does not have agency credit support must be treated as a “credit piece” requiring the analysis of a variety of internal and external factors.

In this chapter we outline the various elements that drive the performance of nonagency MBS, and also examine the interactions of these factors. We then examine a useful framework for understanding the evolution of a population's credit profile, and conclude with a discussion of a variety of techniques used to evaluate the credit risk and expected returns of private-label securities.

FACTORS IMPACTING RETURNS FROM NONAGENCY MBS

The analysis of agency MBS is focused on estimating the ...