Tuckman chapter 21

Discussion in 'P2.T5. Market Risk (25%)' started by Hend Abuenein, Jan 16, 2012.

  1. Hend Abuenein

    Hend Abuenein Active Member

    Hi David,

    These questions are referring to you P2.T5 Study Notes for 2011 :

    1- What is the difference between "Pass through" and MBS?

    2- Would you please clarify the definition of a current coupon rate? p.43

    3- This sentence defines a burnout effect :


    Would you please explain what it means for a mortgage pool to be "heavily re-financed in the past"?
    How many times can a pool be refinanced?

    Thank you
  2. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi Hend,

    1. In writing practice questions for Veronesi, I used the phrase "pass-through MBS" which illustrates that pass-through are a type (class) of MBS. To me, MBS is the broad class referring to the securitization (what does that mean? it's firstly pooling of mortgage loans because: to securitize is to issue notes to investors, where the notes are collateralized by a pool). So:

    1. securitization: broad, many assets can be collateral: implies an SPV that issues notes collateralized by credit-sensitive assets
    2. MBS (type of securitization where collateral is mortgage loans)
    2a.. MBS can be either "unstructured" = pass through, or
    2b. MBS can be "structured" which tends to broadly refer to CMO and a whole sub-class unto itself. Structuring = the cash flows are being parsed in some way

    ... in this way (although some authors invert/confuse/treat synonymously the terms structuring and securitization), pass-thru MBS are:
    • MBS = securitizations with mortgages as collateral
    • pass-thru = not structuring the cash flows; i.e., each investor has ratable (frational) claim on the cash flows (I want to say "pari passu" but have not vetting that, although the concept applies; in a pass-thu all investors get the same note)
    2. Current coupon rate. It doesn't seem to come up much frankly. Here is the source Tuckman p 60 (emphasis mine):
    So, if today, the homeowner takes out a new mortage loan at a rate of 4.0%, please note that rate will be fixed (often) for the life of the mortgage. Then go forward in time, if interest rates drop (term structure shift down), then at any given future date there will be a LOWER "current coupon;" i.e., if we re-financed the loan, without transactions costs, the new rate. So, in some prepayment models (I think) the lower current coupon can inform a tendency to refinance (that's how people tend to look at it!) ... we don't see it too much b/c we tend to view refinance as a logical function of the value of the loan balance, rather than a lowering of the rate.

    3. Burnout, I like Fabozzi's definition:

    ... Note there is the converse side to it: borrowers who did not take advantage of refinance already on the first drop, may be less likely to refinance anyway

    How many times? individual loans refinance and are prepaid only ONCE; this is the point of modeling prepayment. The pool as an aggregate does not itself get refinanced, rather this refers to a RATE of prepayment (e.g., in 100% PSA, 6% of the pool in year, after seasoning)

    I hope that helps, and i hope you are doing well! Thanks, David
    • Like Like x 1
  3. Hend Abuenein

    Hend Abuenein Active Member

    Hi David, Thank you for the answer. I'm sorry I'm not commenting. My eyes are very strained so I'm reducing my use of the screen and resorting to printing your notes and reading from paper only. Too bad I can't make good of your videos and the forum :(
    Thanks for all.
  4. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hend, oh, I am sorry, I hope it is temporary or you are just being proactive? You don't need to be sorry about not commenting, but I would miss you if you did not visit the forum ... Thanks, David
  5. Hend Abuenein

    Hend Abuenein Active Member

    Thanks David,

    No, I only wish...I had to deactivate my FB account, I peak at certain Twitter hashtags I have bookmarked (including your account) once or twice a week...and my linkedin account is just to prove I know what linkedin is.

    Getting old sucks:mad:
  6. Hend Abuenein

    Hend Abuenein Active Member

    I just realized you took away the "delete reply" option.

    please please bring it back :s
  7. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    I am sorry, geez, I wish i could help with that .... the emoticon proves that you do get to keep your sense of humor for the duration :rolleyes:

    you are teasing about "delete reply"-yes? (I cannot tell as i have superadmin, if you don't have delete reply , I can fix that).
  8. Hend Abuenein

    Hend Abuenein Active Member

    No actually I wasn't teasing.

    A couple of months ago I could delete a reply/post, and I remember having to fill in a reason for deleting.

    Now, at bottom of of reply there are only 2 options: edit and report.

    And opening the edit gives you these options :


    No delete reply option.
    • Like Like x 1
  9. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi Hend,

    Okay, you are correct. We did disable that, I forgot but had to be reminded. We had a security threat (that took our whole site down) and the recommendation, for the moment, was to disable this to avoid a scenario where the practice questions (assets) are not deleted beyond our control. But, I have to think we can restore per post "delete" so i have tasked this as a ticket. I would like to restore this functionality, and i assume it can be naturally restored

    Thank you for the feedback (and for the screenshot)!

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