Mortgage Backed Securities

Understand the types of MBS, factors that influence their investment characteristics, analytic techniques used to evaluate risk and return, and MBS trading/settlement.

CURRICULUM

Day 1

MODULE 1: OVERVIEW OF THE MORTGAGE BACKED SECURITIES MARKET

• Introduction to mortgage backed securities
• Historical background
• Evolution of federal agency mortgage backed securities
• Government National Mortgage Association
• Federal National Mortgage Association
• Federal Home Loan Mortgage Corporation
• Innovations (ARMs, CMOs, SMBS, etc.)
• Originators, servicers, dealers and investors

MODULE 2: MORTGAGES LOANS

• Characteristics of mortgages
• Types of mortgages
• Mortgage cash flows

MODULE 3: MORTGAGE PASS THROUGH SECURITIES

• Types of mortgage pass through securities
• Structural characteristics of pass through
• Weighted average maturity (WAM)
• Weighted average coupon (WAC)
• Weighted average loan age (WALA)
• MBS sector considerations

MODULE 4: DYNAMICS OF MORTGAGE PREPAYMENTS

• Demographic considerations
• Seasonal patterns in prepayment rates
• Home sales activities
• Mortgage refinancing
• Quantifying prepayment speed - PSA benchmark

Day 2

MODULE 1: BOND MATH BASICS OF MBS

• Price present value of projected future cash flows
• Yield to maturity, cash flow yield and bond equivalent yield
• Complexity of MBS
• Yield spreads versus treasuries
• Yield versus return

MODULE 2: ANALYSIS OF PASS THOUGH SECURITIES

• Pass through compared to other fixed income securities
• Prepayments and uncertain average life
• Pass throughs price and cash flow dynamics
• Negative convexity
• Total return analysis
• Option adjusted spread analysis
• Duration measures for MBS

MODULE 3: COLLATERALIZED MORTGAGE OBLIGATIONS

• CMO basics
• Pay through versus pass through securities
• Plain vanilla CMOs - sequential pay bonds
• Z-bond tranches
• Planned amortization class (PAC) bond tranches
• Targeted amortization class (TAC) bond tranches
• Very Accurately Defined Maturity (VADM) bonds
• Floating and inverse floating rate tranches
• Stripped mortgage backed securities - IOs and POs
• CMO valuation issues
• Structural factors affecting value

MODULE 4: MBS TRADING

• TBA trading
• Dollar Rolls

MODULE 5: DESK READY SKILLS KNOWLEDGE CHECK

WHAT YOU'LL LEARN

• Structural features and their impact on valuation and analysis of MBS
• Describe the structural features and cash flow characteristics of pass-through securities
• Recognize the impact of prepayment rates in the analysis and valuation of MBS
• Explain the basic features of agency and non-agency CMOs as well as important types of tranches (sequential pay, Planned AmortizationClass, accrual/z-bond, etc)
• Describe the basic elements of TBA (To Be Announced) trades and dollar rolls