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How Resilient Are MBS to CDO Market Disruptions? By Joseph Mason Joshua Rosner Discussion by Tyler Yang, IFE Group February 15, 2007
The Paper ,[object Object],[object Object],[object Object],[object Object]
Comments ,[object Object],[object Object],[object Object],[object Object]
Typical Private MBS (REMIC) Structure Tranche A1 Tranche A2 Tranche BBB Tranche Residual Prepaid Principal Default Loss  First Loss Default Loss Mezzanine  Loss AA Support Level Mortgage Pool CDO Buys
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],From Home Mortgage to CDO Borrower Lender/ Issuer REMIC Tranches CDO Junior tranches Mortgage pool Mortgage loan $ $ $
Magnitude of Impact ,[object Object],[object Object],[object Object],[object Object]
CDO Investors Borrower Lender/ Issuer REMIC Tranches CDO Junior tranches Mortgage pool Mortgage loan $ $ $ Foreign Investors Mutual Fund Hedge Fund
What Happens if CDO Disappear? ,[object Object],Borrower Lender/ Issuer REMIC Tranches CDO Junior tranches Mortgage pool Mortgage loan $ $ $ Foreign Investors Mortgage REIT Mutual Fund Hedge Fund
Alternative Outlays of Private Mortgages ,[object Object],Borrower Lender/ Issuer REMIC Tranches CDO Junior tranches Mortgage pool Mortgage loan $ $ $ Fund by Capital Purchase PMI Sell as MBB/PT Cross hedge Other credit enhancements
Other Credit Enhancement Methods ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
MORDERNs ,[object Object],US$20B  US seasoned RM G-3  SPV Insurance Premium Default Claims Collateral  ($520M) Issue Proceeds P&LIBOR rate Freddie Mac A, 60M, BBB, 1% B, 30M BBB-, 1.3% C, 50M, BB, 2.85% D, 46M, B, 6.5% E, 64M, NR, 20% * P&LIBOR+Spread Issue Proceeds * Only $57.3M of class E was actually issued.
Why CDOs? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
BBB Trache Is Riskier than BBB Bond Tranche A1 Tranche A2 Tranche BBB Tranche Residual Prepaid Principal Default Loss  First Loss Default Loss Mezzanine  Loss AAA Support Level Mortgage Pool Pass Through BBB Over Collateral Principal & Interest Default Loss  First Loss
Tranche BBB And PT Gets Same Rating Tranche A1 Tranche A2 Tranche BBB Tranche Residual Mortgage Pool Pass Through BBB Over Collateral Loss
Cliff! Tranche A1 Tranche A2 Tranche BBB Tranche Residual Mortgage Pool Pass Through BBB Over Collateral Loss Return = -100% Return = -20%
Understand CDO ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
How Much to Disclose? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Who Should Government Protection? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Risk Based Capital Regulation ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Mortgage Lending: Higher Risk Products ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Probability of Income Shortage Yang, Ling, and Cho, 2006, “Balancing Credit and Interest Rate Risks: Choice between Fixed- and Adjustable- Rate Mortgages”, presented at 2006 International AREUEA coference
Relative Default Risks
Encourage Home Ownership High Income Household Poor Household Homeless current renters young professionals moderate-income households seniors person with disabilities No Yes No Yes Wealth Constrained? Income Constrained?
Conclusions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Housing Market Forecast Follain and Follain, “Searching for Clues About the Future of House Prices”, 2007 Cyberhomes.com

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How Resilient are MBS to CDO Market Disruptions

  • 1. How Resilient Are MBS to CDO Market Disruptions? By Joseph Mason Joshua Rosner Discussion by Tyler Yang, IFE Group February 15, 2007
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  • 4. Typical Private MBS (REMIC) Structure Tranche A1 Tranche A2 Tranche BBB Tranche Residual Prepaid Principal Default Loss First Loss Default Loss Mezzanine Loss AA Support Level Mortgage Pool CDO Buys
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  • 7. CDO Investors Borrower Lender/ Issuer REMIC Tranches CDO Junior tranches Mortgage pool Mortgage loan $ $ $ Foreign Investors Mutual Fund Hedge Fund
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  • 13. BBB Trache Is Riskier than BBB Bond Tranche A1 Tranche A2 Tranche BBB Tranche Residual Prepaid Principal Default Loss First Loss Default Loss Mezzanine Loss AAA Support Level Mortgage Pool Pass Through BBB Over Collateral Principal & Interest Default Loss First Loss
  • 14. Tranche BBB And PT Gets Same Rating Tranche A1 Tranche A2 Tranche BBB Tranche Residual Mortgage Pool Pass Through BBB Over Collateral Loss
  • 15. Cliff! Tranche A1 Tranche A2 Tranche BBB Tranche Residual Mortgage Pool Pass Through BBB Over Collateral Loss Return = -100% Return = -20%
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  • 21. Probability of Income Shortage Yang, Ling, and Cho, 2006, “Balancing Credit and Interest Rate Risks: Choice between Fixed- and Adjustable- Rate Mortgages”, presented at 2006 International AREUEA coference
  • 23. Encourage Home Ownership High Income Household Poor Household Homeless current renters young professionals moderate-income households seniors person with disabilities No Yes No Yes Wealth Constrained? Income Constrained?
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  • 25. Housing Market Forecast Follain and Follain, “Searching for Clues About the Future of House Prices”, 2007 Cyberhomes.com