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

FUNDAMENTALS OF STRUCTURING CMOs

The following four chapters cover some of the fundamental concepts in structuring tranches within deals backed by prime loans. The various concepts can be broadly categorized as follows:

• Credit tranching

Senior/subordinate structures Over-collateralization/excess spread structures

• Divisions of principal

Time tranching Prepayment prioritization Accretion direction Non-accelerated seniors (or NAS) bonds

• Divisions of Interest

Coupon adjustment (or IO stripping) Floater/inverse floater/two-tiered index (or TTIB) combinations Floater/inverse IO combinations

While each of these concepts is addressed separately, it is important to note that the concepts are not mutually exclusive. For example, a form of coupon stripping involves a variation on the floater/inverse floater combination called an inverse IO. In addition, multiple techniques can be used to structure cash flows. As noted in the next chapter, an example may be the creation of a PAC/Support structure, which further involves time-tranching the PAC cash flow. In this context, the main PAC cash flows would be considered the “parent” bond with the resulting tranched PACs labeled as the “children.” Most concepts are utilized in both agency and private label structures, although some are the exclusive purview of certain sectors. (NAS bonds, for example, are almost exclusively a nonagency phenomenon.)

Chapters 6 and 7 explain how to use fundamental structuring techniques for redirecting ...