1.6. Operacionalización de las variables
2.2.7. El proceso de una campaña electoral
2.2.7.4. Control, análisis e interpretación de la campaña en marcha
This report serves as a “starter kit” for investors interested in exploring opportunities within the non-Agency sector. We summarize the main motivations for investing in the non- Agency RMBS sector in the sidebar entitled Reasons for investing in non-Agency RMBS.
Our objective in preparation of this report has been to provide investors with the necessary foundational knowledge to ask the right questions as this material is put into practice. With this goal in mind, we leave readers with a cheat sheet of questions. We
Reasons for investing in non-Agency RMBS
Collateral
BSource of loans and origination processes are identical to mortgages securitized as Agency
BPrice execution determines if loan gets classified as either Agency or non-Agency
BWell defined segments ranging from prime jumbo, “Tier 1” Alt-A, “Tier 2” Alt-A to subprime
BWell channeled issuance with each of an issuer’s shelf specifically associated with specific segments of prime, Alt-A and subprime
Credit
BCurrent levels of credit protection are multiples of observed historical losses
BNo AAA-rated class ever downgraded due to collateral performance issues
BCredit support is adjusted according to the credit quality of the collateral. This allows for the creation of senior-rated classes with adequate credit protection incorporated through structure despite relatively weak credit quality of the collateral
BRelatively high recovery rates in RMBS compare to low recovery rates in other credit sensitive assets (corporates, high-yield, emerging markets), in the event of default
BHistorically superior ratings transitions relative to corporates as evidenced by observed upgrade/downgrade ratios
BHigh level of performance transparency, unrivaled in other credit-sensitive sectors of the bond market
Yield/Convexity
BIncremental historical return has been earned for selling convexity. Excellent credit performance has only boosted realized returns
BOpportunity to pick yield and add/sell convexity relative to Agency RMBS
BCollateral can be a source of adding convexity based on characteristics. Hence, opportunity to add convexity also available through structure. This results in simpler structures in non-Agency relative to Agency CMOs
BSimilar range of structures as in Agency CMO sector, but generally offered at wider spreads
Purchase and post-purchase benefits
BFull loan level data disclosure, not yet the established standard in Agency RMBS
BMonthly availability of static performance data and issuer rankings accessible on Bloomberg (CSMB <GO>, at individual deal level for all CSFB deals, performance rankings for aggregate issuer level for major issuers in each product)
BAggregate market and individual CSFB/other issuer shelf level prepayment and default performance indices, and deal level disclosure on all CSFB deals are also available on LOCuS, CSFB’s fixed-income analytic platform. Analytic capability provided to analyze product/performance comparisons at individual deal, vintage, product, issuer, and market levels
Keys to non-Agency valuation
Determine Collateral Type and Structure
• Classify the collateral type:o jumbo A or Alt-A
o fixed or hybrid
o amortizing or IO
• What is the appropriate gross WAC adjustment to allow comparison with Agency pass-throughs? • Classify the balance:
o conforming or non-conforming
• What is the geographic distribution of the collateral pool?
o California versus non-California
• Classify the credit sector:
o super senior
o senior
o mezzanine
o subordinate
• What is the cleanup call feature and does it affect the bond being analyzed?
o cleanup call at 5% or 10%
o bonds trading at premium or discount
o bonds are amortizing seniors or locked-out subordinates
• What is the NAS percentage?
o A high NAS percentage may indicate higher volatility in cash flows of accelerated seniors in the
deal as a result of the shifting interest structure • Is the pricing ramp reasonable?
o within context of historical prepayment speeds
o within context of projected interest-rate environment
Relative Value of Non-Agency Product Versus Agency CMOs and Pass-Throughs
• What is the price spread versus an Agency CMO with the same coupon?• For a given structure, compare both base case average life and WAL extension/contraction profile • There are no Street median speeds for non-Agency collateral
• Adjust for settlement date differences (non-Agency pass-throughs typically settle end of month whereas TBAs settle mid-month)
• Compare financing between Agency and non-Agency product:
o repurchase rates
o haircuts
• How does carry look versus TBA roll? (The TBA roll market factors in the coupon, financing, prepayment expectations, and market supply and demand technicals to establish the price difference between TBAs settling on two different dates. This price difference, termed the roll, should be compared to the carry on non-Agency product.)
• How does liquidity compare with corresponding Agency sector?
o size of market
o issuance trends
Appendix A – Securitization Deal Participants
Seller:Owns the mortgage loans up until the point they are sold to the Depositor (often an affiliate and described below). Makes representations and warranties with regard to the mortgage loans satisfying rating agencies and underwriting guidelines.
Depositor:
Is a bankruptcy-remote entity organized for the sole purpose of aggregating the mortgage loans into a “pool” or “pools” and securitizing the mortgage loans.
Purchases the mortgage loans from the Seller.
Forms the Trust isolating the mortgage loan pool and from which the securities are issued.
Servicer:
Maintains direct interaction with individual borrowers.
BFor Current Mortgage Loans:
- Collects and processes monthly mortgage payments (principal and interest). - Aggregates and forwards cash received to Master Servicer (described below).
BFor Delinquent Mortgage Loans:
- Pursues borrower to obtain delinquent monthly mortgage payments.
- Commences foreclosure proceedings to obtain ownership of mortgaged property. - Takes title to mortgage property (“REO” or “Real Estate Owned”).
- Aggregates and advances equivalent of delinquent or unpaid monthly mortgage payments to Master Servicer (until deemed “non-recoverable”).
BFor REO Mortgage Loans:
- Maintains REO property in preparation for sale.
- Coordinates with Mortgage Insurance provider, if any, in preparation for claim filing. - Coordinates with realtor and attorneys for REO property sale.
- Aggregates and forwards liquidation proceeds together with any mortgage insurance proceeds to Master Servicer.
BFor ALL Mortgage Loans:
- Aggregates, prepares and forwards loan-level data reports to Master Servicer.
Special Servicer (not in all deals):
BEngaged from the point of original securitization and over the entire life of the securitization to provide expertise in maximizing cash flow or liquidation proceeds from sub- and/or non-performing mortgage loans.
BMay be required to, or have the option to, directly service sub- and/or non-performing mortgage loans.
BIf directly servicing, aggregates and forwards cash received and loan-level data reports to Master Servicer.
Master Servicer (not in all deals):
BCollects and reconciles monthly remittances and loan-level data reports from individual Servicers (and/or Special Servicer).
BAggregates and forwards cash received and loan-level data reports to Trust Administrator (described below).
BAdvances any cash not received from individual Servicers to Trust Administrator and pursues Servicers for reimbursement.
Securitization Deal Participants (continued)
BDepending on the role (if any) of the Special Servicer, takes possession of servicing from Servicers in default of obligations.
Trust Administrator (not in all deals):
BCollects and reconciles monthly remittance and loan-level data reports from Master Servicer (often an affiliate).
BApplies monies received pursuant to securitization cash flow rules.
BPrepares monthly securitization remittance reports.
BForwards monthly distribution amounts and reports to Trustee (described below) for distribution to security holders.
BPrepares I.R.S. quarterly tax returns for the trust and prepares reports for the S.E.C.
Trustee:
BOversees the Trust formed by the Depositor and acts on the Trust’s behalf both at issuance and during the life of the securitization.
BForwards monies and reports received from Trust Administrator to security holders.
BAdvances any cash not received from the Trust Administrator and pursues Trust Administrator (or its Master Servicer affiliate) for reimbursement.
Appendix B – Rating Agency Methodologies
Rating agencies play a significant role in the non-Agency RMBS market. Their functions include establishing methodologies to evaluate the credit quality of a wide range of prime to subprime borrowers, staggered across the credit continuum, examining the structural integrity of credit protection offered, on a deal-by-deal basis, and establishing credit enhancement levels for every individual deal carrying their rating.
Each of the four rating agencies, Standard and Poor’s (S&P), Moody’s Investors Service, Fitch Ratings, and Dominion Bond Rating Service (DBRS), use proprietary models in their independent evaluation of credit risk for a given pool of mortgage loans. In this section, we profile the rating agency methodologies of S&P, Fitch Ratings, and DBRS for prime jumbo RMBS (the published methodology from Moody’s Investors Service was unavailable as of the time of publication of this report). While we excerpt key sections of each of their methodologies, we encourage readers to review these in entirety (available on their websites, Table 37) for comprehensive coverage. We also encourage readers to contact the individual analysts at each of the rating agencies for further details, especially as these methodologies and their individual views are subject to change as markets and products evolve.
Table 37 Rating agency websites
Rating Agency Web Site
Standard and Poor's www.standardandpoors.com
Moody’s Investors Service www.moodys.com
Fitch Ratings www.fitchratings.com
Dominion Bond Rating Service www.dbrs.com
Common factors in the evaluation of RMBS by each of the rating agencies include: i. Default/foreclosure frequency, the probability that a loan will default,
ii. Loss severity, the amount of loss realized on a defaulted loan,
iii. Conservative scenarios, characterized by higher default frequencies and loss
severities, to separately stress higher- versus lower-rated classes within a specific deal,
and
iv. Baseline default and loss severity assumptions, for a given collateral type,
adjusted based on borrower characteristics and loan attributes of a given pool of loans.
Standard and Poor’s (S&P)
(US Residential Subprime Mortgage Criteria – May 2000)
Base case mortgage pool defined
S&P defines the base case, prime quality pool comprised of mortgages with the following characteristics:
- fixed-rate, - fully-amortizing, - owner-occupied, - level payment,
- first liens on single-family detached homes,
- well dispersed geographically, in areas with strong economic bases,
- loan balances that do not exceed $400,000 and represent no more than 80% of the value of the home,
- underwriting guidelines which require that the borrower have no history of delinquent payments and a minimum FICO score of 660,
and
- at least 300 loans in count within a given pool to boost statistical confidence.
Frequency of foreclosure
S&P’s methodology uses different levels of frequency of foreclosure for each credit grade within a prime jumbo deal (see Table 38). These are higher for the stronger rating levels since higher-rated classes should, by definition, be able to withstand higher levels of defaults and losses.
Table 38 S&P base frequency of foreclosure assumptions for a prime quality pool
Rating Level Frequency of Foreclosure (%)
AAA 15 AA 10 A 8 BBB 6 BB 3 B 1.5 Source: S&P
S&P attributes variations in frequency of foreclosure assumptions, from those defined above, on prime fixed-rate mortgage pools to differences in loan characteristics, including borrower credit quality, LTV ratios, property type, loan purpose, occupancy status, mortgage seasoning, pool size, loan size, loan maturity, loan documentation, and lien status. Table 39 summarizes adjustments to the base case FOF assumptions corresponding to variations in these characteristics.
Table 39 Frequency of foreclosure varies according to loan characteristics
Characteristics
Effect on FOF
(versus Base Case Assumption)* Impact
Borrower Credit Quality - Higher borrower credit quality is expected to result in better credit performance.
LTV Ratios +
Higher LTVs have historically been associated with worse credit performance, as a result of less borrower equity in the property and a higher percentage of the home value at risk.
Property Type
Single-Family Detached (-) /
Single Family Attached, Low-rise Condos, 2-Family Properties (+) /
High-rise Condos, Co-ops, 3-4 Family Properties (More +)
Risks associated with lower demand and higher price volatility of non- single-family properties making these riskier loans.
Loan Purpose Purchase, Rate/Term Refinance (No adjustment) / Cash-out Refi (+)
Cash-out refinance loans are riskier because of difficulty associated with measuring the property’s market value as there is no actual sale price, based on a specific buy/sell transaction.
Occupancy Status Non-Owner Occupied (+) / Investor Property (+)
Higher probability of homeowner defaulting on investment property or a second home than on primary residence.
Rent, which may not be available, is needed to cover mortgage payments due on an investor property mortgage.
Mortgage Seasoning -
Borrower's ability to pay generally improves over time.
The loan amortizes and the borrower builds equity in the home. As equity builds, the borrower's willingness to pay increases.
Pool Size
300+ loans (-) / <300 & >100 loans (+) / <100 loans (More +)
Pools made up of 300+ loans ensure sufficient diversity and comfort with accuracy of loss assumptions.
Loan Size +
Loans with higher loan balances are considered riskier because they are likely to suffer greater market value declines in downturns as a result of limited demand for higher-priced properties.
Loan Maturity +
Shorter terms and faster amortization translate to lower balances as a loan seasons. This subjects these to potentially lower credit issues as a loan proceed up the default ramp.
Loan Documentation
For a given LTV range: Full Doc (-) / Low Doc (+) / No Doc (More +)
Reduced documentation introduces an added risk factor. (This may be offset by lower LTV requirements.)
Lien Status (First vs. Second Lien)
Second Lien (+) / Combined LTV (+)
Second lien mortgages allow equity extraction from a property and increased use of borrower leverage.
*A ‘+’ sign in this column indicates that the frequency of foreclosure assumption is adjusted upward for a higher value/greater degree of the specific characteristic in question, and vice versa for a ‘-‘ sign.
Loss severity
S&P’s loss severity assumptions factor in an assumed market value decline specific to each credit grade level. A foreclosure cost equivalent of 25% of the property value is also assumed (see Table 40).
Table 40 S&P base loss severity, market value decline, and foreclosure cost assumptions for a prime quality pool
Rating Level Loss Severity (%) Market Value Decline (%) Foreclosure Costs* (%)
AAA 43 34.5 25 AA 40 32 25 A 35 28 25 BBB 34 27.2 25 BB 33 26.4 25 B 33 26.4 25
* Foreclosure costs include an interest carry component assuming a 12% mortgage rate, 5% brokerage fees, 3% legal fees, 3% taxes, and other costs (2%).
Source: S&P
Table 41 illustrates the loss severity calculation at the AAA-rating level using S&P’s assumptions for market value declines and foreclosure costs.
Table 41 Calculating loss severity using S&P's assumptions for market decline and foreclosure costs at the AAA level*
% of Purchase Price
% of Loan
Value Dollars ($)
Purchase Price of Home (Home Px) 100,000
Loan Balance (Loan Bal) 80% 80,000
Market Value Decline (MVD) 34.5% 34,500
Market Value at Foreclosure (FCL Val = Home Px - MVD) 65,500 Market Loss (Mkt Loss = FCL Val - Loan Bal) 14,500
Foreclosure Costs (FCL Cost) 25% 20,000
Total Loss (Mkt Loss + FCL Cost) 34,500
Loss Severity (Total Loss / Loan Bal) 43%
*Assumes first-lien mortgage loan, owner-occupied, single-family detached property, with an LTV of 80%. The ‘AAA’ category assumes a 34.5% market value decline in an economic depression.
Source: S&P
S&P attributes variations in loss severity on prime, fixed-rate mortgage pools to
differences in loan characteristics, including LTV ratios, mortgage insurance, lien status, loan balance, loan maturity, loan purpose, property type, occupancy status, geographic dispersion, and mortgage seasoning. Table 42 summarizes adjustments to these base loss severity assumptions corresponding to variations in each of these characteristics per S&P’s methodology.
Table 42 Loss severity varies with loan characteristics
Characteristics
Effect on Loss Severity (versus Base Case
Assumption)* Impact
LTV Ratios + Higher LTVs have historically been associated with higher losses, given a higher % of the home’s value at risk.
Mortgage Insurance -
This is dependent on the ability of the insurer to pay claims, whereby an insurer with a rating of AA or above will be granted full credit by S&P for insurance coverage.
Lien Status (First vs.
Second Lien) Second Lien (+)
Second lien mortgages are more sensitive to property value declines and absorb losses ahead of first lien mortgages, whereas first lien mortgages have the first claim to foreclosure proceeds.
Loan Balance >$370K (+)
At $370K, the foreclosure period is assumed to be 12 months and increases 1 month for every additional $10,000 up to 24 months, increasing costs and thereby loss severity.
Loan Maturity +
Shorter terms and faster amortization translate to lower balances as a mortgage seasons. This subjects a lower balance to credit issues as a loan progresses up the default ramp.
Loan Purpose Purchase, Rate/Term Refinance (No adjustment) / Cash-out Refi (+)
Cash-out refi is riskier because of difficulty measuring property market value because there is no established price based on a buy/sell transaction.
Property Type
Single-Family Detached (-) /
Single Family Attached, Low-rise Condos, 2-Family Properties (+) / High-rise Condos, Co-ops, 3-4 Family Properties (More +)
Risks associated with lower demand/liquidity and higher price volatility make non-single-family properties riskier.
Occupancy Status Non-Owner Occupied (+) / Investor Property (+)
Higher probability of homeowner defaulting on investment property or a second home than primary residence. Rent, which may not be paid, is needed to cover mortgage payments due on an investor property mortgage.
Geographic Dispersion - Increased diversity implies less vulnerability to economic strength or weakness based on geographic dispersion.
Mortgage Seasoning -
Borrower's ability to pay generally improves over time.
The loan amortizes and the borrower builds equity in the home. As equity builds, the borrower's willingness to pay increases.
*A ‘+’ sign in this column indicates that the loss severity assumption will be adjusted upward for a higher value/greater degree of the characteristic in question, and vice versa for a ‘-‘ sign. Source: Credit Suisse First Boston (US Mortgage Strategy), S&P
Servicer quality
S&P evaluates a servicer’s ability to carry out its basic functions by designating a ranking of STRONG, ABOVE AVERAGE, BELOW AVERAGE, or WEAK. Table 43 summarizes the definition of these rankings. A servicer’s involvement in the management, monitoring, and maintenance of a mortgage loan’s performance plays an important role in assessing the potential for maximizing recoveries. A servicer’s past performance influences the required credit enhancement for a specific rating level. Historically lackluster performance has resulted in higher subordination levels, and vice versa.
Table 43 S&P servicer ranking definitions
Ranking Qualifications
STRONG
Servicer demonstrates the highest ability, efficiency, and competence in managing large and highly diverse asset portfolios, as well as a proven track record of strong and stable management, state-of-the- art computer technology, and excellent internal controls, policies, and procedures.