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Subprime Mortgage Credit Derivatives by FRANK J. FABOZZI, THOMAS A. ZIMMERMAN, DOUGLAS J. LUCAS, SHUMIN LI, LAURIE S. GOODMAN

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CHAPTER 1

Overview of the Nonagency Mortgage Market

In this chapter we look at the major types of nonagency mortgage product, along with their defining characteristics and the variation in issuance volumes.

The value of residential 1–4 family real estate in the United States is $23 trillion. Against this, there is $10.7 trillion in mortgage debt, with the remaining 53% ($12.3 trillion) representing homeowner equity. That equity value is created because either a homeowner has no mortgage on their home, or the home's value exceeds the mortgage (via any combination of mortgage pay-down, home price appreciation, or loan-to-value mortgage issuance).

Of the $10.7 trillion in residential mortgage debt, $6.3 trillion (58%) has been securitized. The securitized portion can be broken down into agency mortgages and nonagency mortgages. Agency mortgages are those guaranteed by either the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or one of the government-sponsored enterprises (GSEs), Fannie Mae or Freddie Mac. Nonagency mortgages are mortgages that, for a variety of reasons, do not meet underwriting criteria required by the agencies. Mortgages that fail to meet the underwriting standards of the agencies are said to be nonconforming mortgages.

Exhibit 1.1 shows that in 2007, agency mortgages represented approximately 66% of the securitized market, with the remaining 34% consisting of nonagency mortgages. The nonagency share contains jumbo prime (8% of the ...

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