Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques

PRIVATE LABEL SENIOR STRUCTURING VARIATIONS

Nonaccelerated Senior Bonds

Nonaccelerated senior bonds or NAS bonds have their origins in the profile of prime subordinate tranches. The lockout and prepayment protection inherent in the shifting interest structure creates long-duration bonds that have stable average life and duration profiles. However, many investors that have a need for these types of tranches cannot invest in subordinate securities, often because of regulatory prohibitions (such as ERISA for pension funds). The NAS bond mimics the cash flow structure of subordinates while creating bonds that are senior in loss priority. While the initial concept was introduced in the prime market, mortgage ABS deals also are structured with NAS tranches, although the bonds are created in a slightly different fashion.

Similar to subordinate tranches, NAS bonds do not receive principal payments for the first five years. After year 5, the proportional amount of principal received generally scales up on a yearly basis, in the same fashion as the shifting interest, lockout schedule shown in Exhibit 8.3. One difference between NAS and subordinate bonds is that subs receive amortized principal during the first five years, while NAS bonds typically have a complete lockout of both amortized and prepaid principal. After the lockout schedule expires (generally after year 10), the NAS tranches receive their full pro rata share of principal cash flows from the collateral. The resulting ...