Study On Collateralized Mortgage Obligations (CMOs)

With the development of perfect primary mortgage market, to establish the Chian's secondary mortgage market is one of the most important ways to promote the healthy growth of domestic housing industry and speed the pace of residents' homeownership as well. Now there is a large body of academic and industry research on the establishment of mortgage-backed securities (MBS) market, much of which involves introduction of various types of MBS such as mortgage pass-through securities (MPTs), mortgage pay-through bonds (MPTBs), mortgage-backed bonds (MBBs), collateralized mortgage obligations (CMOs) and so on. But we can't see any book or paper providing a systematic analysis of these types of mortgage -backed securities, especially CMOs. Thus, this dissertation is devoted to presenting complete coverage of the collateralized mortgage obligations so as to fill in some blank of this field.This dissertation takes fixed-income securities theory and economic principle of structured finance as guiding theories, and reveals the characteristics inherent in CMOs, which is very important for us to develop innovative types of MBS in China.Firstly, this dessertation introduces the history of MBS market in U.S.A and its other three types of MBS: MPTs, MPTBs and MBBs. Meanwhile, it also puts forward a qualitative comparison among these four different MBS. Through a case study , this dissertation explores the principle of CMOs innovation, which include how to stratify the mortgage pools according to the characteristics of individual mortgage and to tailor the cash flows from the pools. In addition, the steps of creation of CMO tranches (or pieces) is also discussed.Secondary, this dissertation quantitatively analyzes the cash flows of various CMO structures such as sequential-pay CMOs (SPC), planned amortization class (PAC)/supports, principle-only securities (POs), interest-only securities (IOs), floarters and inverse floarters (IFs). Moreover, this chapter focuses the analysis on cash flows of different thanches of PAC such as tranche A, tranche B, tranche C, tranche Z and residual tranche.On the basis of cash flow analysis, this dissertation offers the key methods of CMO pricing, for example, discounting cash flow method and option-adjusted spread (OAS) analysis. Additionally, ir also contains a deep analysis of CMO duration andconvexity, and how to calculate these two price sensitivity indicators when allowing for the prepayment embedded in CMOs.Finally, this dissertation presents the prepayment risk management. It firstly lists and analyzes many kinds of drivers,for example, interest level and housing turnover rate which cause borrowers to prepay their mortgages. Then, various prepayment assumptions to compute CMOs yield, for example, "FHA experience", CPR and PSA model are presented. It also provides an analysis framework of how to execute the prepayment risk management.