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Mortgage-backed Securities (mortgage-backed + security)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

Borrower Credit and the Valuation of Mortgage-Backed Securities

REAL ESTATE ECONOMICS, Issue 4 2005
Francis A. Longstaff
We study the valuation of mortgage-backed securities when borrowers may have to refinance at premium rates because of their credit. The optimal refinancing strategy often results in prepayment being delayed significantly relative to traditional models. Furthermore, mortgage values can exceed par by much more than the cost of refinancing. Applying the model to an extensive sample of mortgage-backed security prices, we find that the implied credit spreads that match these prices closely parallel borrowers' actual spreads at the origination of the mortgage. These results suggest that models that incorporate borrower credit into the analysis may provide a promising alternative to the reduced-form prepayment models widely used in practice. [source]

The use of term structure information in the hedging of mortgage-backed securities

THE JOURNAL OF FUTURES MARKETS, Issue 7 2005
Jason Fink
This article examines the importance of term structure variables in the hedging of mortgage-backed securities (MBS) with Treasury futures. Koutmos, G., Kroner, K., and Pericli, A. (1998) find that the optimal hedge ratio is time varying; we determine the effect of yield levels and slopes on this variation. As these variables are closely tied with mortgage refinancing, intuition suggests them to be relevant determinants of the hedge ratio. It was found that a properly specified model of the time varying hedge ratio that excludes the level and slope of the yield curve from the information set would provide similar out-of-sample hedging results to a model in which term structure information is included. Thus, both the level of interest rates and the slope of the yield curve are unimportant variables in determining the empirically optimal hedge ratio between MBS and Treasury futures contracts. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:661,678, 2005 [source]

The Effect of Refinancing Costs and Market Imperfections on the Optimal Call Strategy and the Pricing of Debt Contracts

REAL ESTATE ECONOMICS, Issue 4 2005
Kenneth B. Dunn
This article, which was originally written in 1986, develops a methodology for valuing mortgage-backed securities with refinancing costs. We solve simultaneously for the valuation of the mortgage-backed security (loan) and the borrower's refinancing strategy, pricing all coupon levels simultaneously. Because the borrower may refinance his or her loan and incur costs at many times in the future, the optimal refinancing decisions arise from an optimal dynamic strategy that reflects the costs of all potential future refinancings. Though the borrower faces multiple rounds of refinancing costs, the market value of the loan cannot exceed the call price plus a single round of refinancing costs. [source]