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Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques by WILLIAM S. BERLINER, ANAND K. BHATTACHARYA, FRANK J. FABOZZI

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STRUCTURING DIFFERENT MORTGAGE PRODUCTS

The mortgage market can be broadly classified into two “kingdoms” from the perspective of borrower credit. The larger and more traditional sector is generally referenced as “prime” mortgages, in that the loans are considered to have a high degree of credit quality and are expected to exhibit a low incidence of defaults and principal losses. The primary focus of structuring is to improve the overall deal execution by creating bonds that appeal to different segments of the investor community, targeting both different average life and duration “buckets” and different degrees of exposure to prepayment and duration uncertainty.
Due to the high quality of the loans, credit enhancement in the prime sector is generally straightforward. As discussed above, credit support for prime deals is generally provided either through the auspices of government agencies or through senior/subordinate structures that create sectors within a structure that have different degrees of priority with respect to both cash inflows and loss writeoffs. While structurers have some flexibility with respect to creating the most efficient credit enhancement in private label structures, the credit support levels are typically dictated by the rating agencies, and the subordination structures are fairly straightforward. Thus structuring the senior portion of the deal (i.e., the triple-A bonds in the structure) has the greatest impact on the execution of the deal.
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