Module 1: Granular Asset Analysis
The fundamental unit of structured finance is the asset pool. Understanding collateral quality is the first step in risk assessment.
RMBS: Residential
RMBS pools consist of home mortgages. Primary risks include Credit Default and Prepayment Velocity. Analysts use FICO scores and LTV distributions to model loss severity.
Weighted Average Coupon (WAC) vs. Current Mortgage Rates.
CMBS: Commercial
CMBS deals pool loans on commercial properties (Offices, Malls, Hotels). They are typically non-recourse and depend heavily on Net Operating Income (NOI) and lease renewals.
Debt Service Coverage Ratio should typically be > 1.2x for stable office assets.
ABS: Consumer Debt
ABS pools non-mortgage consumer loans like Auto, Credit Card, and Student debt. Performance is measured by Charge-off rates and Recovery lags.
Excess Spread acts as the first line of defense against consumer defaults.
Module 2: The Structural Waterfall
How to transform a pool of loans into a multi-tranche security through legal isolation.
SPV & Legal Remoteness
Securitization requires a Special Purpose Vehicle (SPV). The assets are sold to the SPV in a "True Sale," shielding investors from the originator's bankruptcy.
Enhancement Mechanisms
- • Subordination: Directing losses to lower tranches.
- • Overcollateralization: Assets in pool > Bond principal issued.
- • Reserve Accounts: Cash buffers for interest shortfalls.
Payment Priority
Module 3: Pricing & Prepayment Models
Modeling the cash flow timing is the core quantitative challenge in structured credit.
Weighted Average Life (WAL)
MBS do not have a fixed maturity. Analysts calculate the WAL by weighting the time to receive each unit of principal repayment.
Where Principal_Repayment includes both scheduled and unscheduled payments.
The Prepayment Bridge
Single Monthly Mortality (SMM) is the month-over-month rate of prepayment, derived from the annual CPR.
Option-Adjusted Spread (OAS)
Module 4: Stochastic Engineering
Using SDEs to simulate thousands of potential interest rate paths.
Hull-White Dynamics
The Hull-White model accounts for mean reversion and matches the initial yield curve.
Quant Challenges
- • Negative Convexity: MBS prices are capped because borrowers refinance when rates drop.
- • Path Dependency: Prepayment behavior is influenced by the 'burnout' from previous low-rate periods.
- • Default Correlation: Joint probabilities modeled via Gaussian or Student-t Copulas.
Module 5: Investor Accessibility
From Institutional QIBs to Retail ETFs.
Merits
- Yield Pickup: Complexity premium offers 50-200bps over Corporates.
- Secured Debt: Direct claim to underlying collateral (Homes/Cars).
- Diversification: Uncorrelated with equity earnings cycles.
Access
- ETFs: MBB (iShares), VMBS (Vanguard) for Agency MBS.
- Mutual Funds: PIMCO/DoubleLine for active Non-Agency selection.
- REITs: High-yield exposure via mortgage-REIT leverage.