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

COMPARING THE ANALYSIS OF AGENCY AND PRIVATE LABEL TRANCHES

In Chapter 8, we contrasted structuring techniques utilized in agency and private label CMO deals. As a corollary of the discussion of valuation techniques for various MBS, the relative ease of valuing bonds in the different sectors should be addressed. While the same techniques are typically used to evaluate agency and non-agency bonds, differences between the products often make valuing private label bonds more difficult and subjective. In some cases, these differences stem from the structures themselves; however, other differences also contribute to the wider dispersion of dealer quotes for senior private label securities vis-à-vis those created from agency deals.

• Agency CMO structures have a greater degree of standardization than do private label deals. Agency PACs, for example, are structured using PAC bands to generate the schedule; while somewhat restrictive, this technique allows for a fair degree of transparency with respect to the attributes of the PACs being created. Moreover, the bands utilized to structure PACs are fairly consistent across deals. (Typically, currentcoupon PACs are structured with lower bands in the area of 100% PSA, and upper bands ranging from 250-300% PSA.) The super-stable structures discussed previously in this chapter have schedules that are generated manually, through an iterative trial-and-error process. While allowing for greater structuring flexibility, this technique creates ...