By the end of this course, you will be able to:

• Describe the characteristics of mortgage-backed securities that distinguish them from other real estate-related securities such as mortgage bonds and real estate investment trusts (REITs).
• Identify the factors that cause U.S. mortgage-backed securities to be considered a different category of fixed income securities compared to asset-backed securities.
• Identify the U.S. mortgage agencies and distinguish among them regarding their legal status, nature of the guarantees they offer and types of mortgages they securitize.
• Identify the two major types of securities based on the securitization of mortgages and describe the type of structuring connected with each.
• Describe the basic features of agency pass-through securities and collateralized mortgage obligations (CMOs) and how their structural differences impact cash flows received by investors.
• Be familiar with mortgage-related terminology such as non-recourse debt, underwater mortgages and short sales as well as their implications for mortgage loans and their consequences for the risk and expected returns to investors in mortgage-backed securities.
• Describe the common ways for categorizing mortgage loans such as: property type, loan type, conventional/non-conventional and conforming/non-conforming as well as the significance of the distinctions among them.
• Identify the most common types of mortgage loans (fully amortizing, balloon and interest only) and describe the how each impacts the payments due from the mortgagor (borrower).
• Explain the main aspects involved in the creation of an agency pass-through security including: methods of mortgage loan acquisition, asset securitization by the sponsor/agency and characteristics of loans in a single collateral pool.
• Describe the period cash flows in an agency pass-through security from payment by mortgagor through distribution to investors including: role of mortgage servicers, impact of agency guarantees on cash flows, excess spread, weighted average coupon (WAC), pass-through rate and pro rata distribution to investors.
• Identify the primary risk factor facing holders of agency pass-through securities, pre-payment risk (uncertain average life or embedded optionality), and how it is impacted by rising or falling interest rates.
• Explain the pattern of contractual cash flows on a fixed rate level payment fully amortizing mortgage, the principal amortization schedule on such contracts and the impact of partial prepayments.
• Discuss the factors that influence prepayment rates on pools of conforming single-family residential mortgage loans.
• Describe how the principal and interest payments to pass-through security holders will be influenced by different prepayment rates both period by period and cumulatively over the life of the security.
• Describe the how the interaction between prepayment risk and reinvestment risk adversely impacts holders of pass-through securities in both rising and falling interest rate environments.
• Identify the factors that cause pass-through securities to exhibit negative convexity and the factors that will result in a greater or lesser negative convexity.
• Identify the composition of the monthly cash flows to holders of pass-through securities: monthly amortization of principal, pre-paid principal and pass-through rate on the outstanding principal as well as how the size and composition of the monthly cash flows will vary over time at different prepayment rates.
• Distinguish between rate of return and the different yields associated with mortgage-backed securities: yield to maturity (bond equivalent yield) and cash flow yield.
• Describe the commonly used prepayment benchmarks for expressing prepayment speeds – PSA (Public Securities Association) and CPR (Conditional or Constant Prepayment Rate) – and their role in industry price and yield conventions.
• Identify spreads used in assessing the risk and relative value, – nominal spread and Z (zero volatility) spread, – and the basis for their computation.
• Describe the basis for an OAS (option-adjusted spread) analysis and its general purpose.
• Explain the primary differences between CMOs and pass-through securities.
• Describe the different types of collateral pool that provide the cash flow to investors in agency CMOs including whole-loan CMOs and Re-REMICs.
• Analyze the difference in prepayment risk to investors in different tranches of an agency CMO comprised of sequential-pay tranches versus investors in an agency pass-through security.
• Describe the key features of the most common types of tranches in agency CMOs: Z (accrual) bond tranches, PAC (planned amortization class) tranches and TAC (targeted amortization class) tranches.
• Analyze the relative risk and return of the main types of tranches and how their inclusion in an agency CMO impacts the cash flows to investors in the other tranches.
• Describe the cash flow characteristics of the two types of stripped mortgage-backed securities – IOs (interest only) and POs (principal only) – relative to prepayment rate changes as well as their risk management applications.
• Describe the primary differences between non-agency and agency CMOs.
• Identify the main types of internal credit enhancements commonly used in non-agency CMOs (cash reserves, over-collateralization and senior/subordinated structures), how they operate to insulate investors from credit losses and the degree to which they protect investors in senior, mezzanine and subordinated tranches.
• Describe the typical allocation priorities for return of principal, both amortization of principal according to scheduled mortgage contracts and pre-paid principal as well as allocation of credit losses.
• Contrast credit risk, prepayment risk and the typical amount of credit enhancements for different types of collateral, especially prime jumbo and subprime mortgage securitization.
• Describe the structure and purpose for creating Giants (FHLMC), Megas (FNMA) and Platinum securities (GNMA).
• Explain reverse mortgages and the cash flow and risk characteristics of reverse mortgage securitization.
• Identify and explain the structural similarities and differences of commercial mortgage-backed securities (CMBS) with both agency and non-agency CMOs.
• Describe the difference in credit risk and prepayment risk between CMBS and agency CMOs structured from residential mortgage collateral as well as the sources of the differences.
• Identify and explain the various types of prepayment penalties and restrictions commonly found in commercial mortgages.
• Explain the common features of the structured payouts on CMBS including IO strips and super-senior tranches.
• Describe the types of agency multi-family securitization, the various ways of structuring of the collateral pool and the payouts to investors.
• Identify the types of mortgages securitized in agency multi-family securitization.
• Describe the characteristics of TBA (to be announced) trading and specified (spec) trading as well as the types of MBS that get traded each way.
• Identify the minimum criteria that must be included in a TBA trade, the common special trade consideration (as well as factors motivating their inclusion), good delivery requirements and adverse selection.
• Explain the factors that cause the prices of specified trades and TBA trades to differ, and the forward pricing of TBA trades based on (cost of) carry considerations.
• Describe the structure of a dollar roll including the pricing of the MBS collateral, the drop, the equivalent securities returned by the dealer and the ownership of the collateral cash flows.
• Describe the factors that determine the attractiveness of dollar rolls to investors holding MBS and what determines the effective cost of funds if a dollar roll is entered into.
• Describe the features that distinguish ARMs (adjustable rate mortgages) from Hybrids (hybrid adjustable rate mortgages) and the most common structures of each.
• Explain the common structural features of ARMs including: index rate, net and gross margins, period and lifetime caps and floors and teaser rates.
• Analyze the impact of caps and floors as well as market rates versus cost of fund indexes (COFIs) regarding ARMs cash flows.

Portfolio managers, research analysts, back office professionals, financial analysts, auditors, and compliance staff