Consider a new CMBS deal with the following tranches, ratings, and tranche size:
- A1, AAA, 6% (3yr maturity target)
- A2, AAA, 9% (5yr maturity target)
- A3, AAA, 4% (7yr maturity target)
- A4, AAA, 58% (10yr maturity target)
- B, AA, 4%
- C, A, 4%
- D, BBB, 6%
- E, BB, 5%
- F, NR, 4%
A large loan in the CMBS conduit, which represents 15% of the principal of the deal defaults in the first year and, upon resolution has a 60% loss severity. Which of the following best describes the effect on the pool?
(a) The D, E and F tranches are wiped out
(b) The F tranche is wiped out and the A1 tranche is paid off
(c) The E and F tranches are wiped out and the A1 tranche is repaid
(d) The A1 and A2 tranches are repaid
Which of the following statement relating to the Option Adjusted Spread is FALSE?
(a) Calculating the OAS for an IO mortgage backed security requires an interest rate model and a prepayment model
(b) I want to buy securities with a positive OAS and sell securities with a negative OAS
(c) If the prepayments come in faster than expected by the model on a mortgage pool, the model will show a positive OAS for the IO tranche.
(d) If the prepayments come in faster than expected by the model on a mortgage pool, the model will show a negative OAS for the IO tranche.
Which of the following facts/trends is unfavorable for the health and future prosperity of the single‐family rental market?
(a) The urbanization rate is continuing to increase
(b) Generation Y is showing little appetite for home ownership as it comes of age
(c) Mortgage lending standards are getting laxer again
(d) Turnover in single-family housing is lower than in multifamily housing
(e) The SFR securitization deals have seen spreads come in
Section II: Numerical
A CMBS is collateralized by the following interest‐only mortgages with five‐year
It is tranched as follows:
Assume all bonds were issued on May 1st, 2017.
(a) Calculate the collateral WAC, the distribution WAC, and the excess spread for the first year, assuming no defaults during the first year?
(b) The excess spread is collateralized into a CMBS WAC IO security. You buy the IO bond when the structure is set up. If your discount rate is 5%, how much are you willing to pay for the entire IO tranche at origination (May 1, 2017)? The open period is the last year of the mortgages, while the first four years have defeasance. Assume a 0% CPY during the defeasance phase and 50% CPY during the open period. Assume a 0% CDR throughout. Assume all interest payments are made on the last day of the year.
(c) We are now 3 years later (May 1, 2020). There were no defaults in year 1 and no defaults in year 2. In the last but one day of year 3, mortgage #3 defaults and is immediately resolved with a loss severity of 50%. What is the excess spread on the structure right after the default has been resolved?
(d) What is the new price of the IO, on the last day of year 3, assuming no further defaults and the same discount rate CPY assumptions as before?
(e) If you sell the IO on this day, what was your IRR on the 3‐year investment? Explain why it is higher or lower than your expected return (discount rate)?
Section III: Essay Question
If you were the chief regulator in charge of designing the future of securitization, what concrete actions would you take to enable a resurgence of solid and safe structured finance infrastructure?
Answer this question from a risk management angle, using what you have learned in this module (and potentially in previous modules).
Please, no more than 1 page in 11pt font.
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