tag:blogger.com,1999:blog-30643134.post880461745915247627..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: Agency MBS: You will be tempted by the yieldy side of the ForceAccrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-30643134.post-73002437630064894892008-07-24T14:39:00.000-05:002008-07-24T14:39:00.000-05:00Its been in the back of my mind to write a post ab...Its been in the back of my mind to write a post about OAS for a long time. <BR/><BR/>My major problem is with the vol assumption. What should vol be? Who knows!?!?<BR/><BR/>My other problem is that the MBS prepayment decision is based on a number of economic factors. Not just interest rates. Right now is an extreme example, as home owners are more likely to just wait out this period rather than move to another house. But in most periods, there are non-interest rate events which play a very big role in home owners decisions.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-91456120583289481922008-07-24T14:02:00.000-05:002008-07-24T14:02:00.000-05:00P.S. I would personally love to read a rant about ...P.S. I would personally love to read a rant about OAS pricing. I always thought it was pretty arbitrary myself, and dealer OASs are totally all over the map even on liquid products like TBAs.Keithhttps://www.blogger.com/profile/15217923679078743519noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-16660720727210540542008-07-24T13:59:00.000-05:002008-07-24T13:59:00.000-05:00One should of course understand with Mortgage back...One should of course understand with Mortgage backed IOs that if everyone prepayed tomorrow you would get absolutely no money back at all. Not likely to happen, But the risk of an unexpected refi wave can have major consequences.<BR/><BR/>For example: if the bank behind the IO pool were able to turn a bunch of the loans into these bailout FHA loans, presumably that would take them out of the pool and you will get nil from them.<BR/><BR/>I have heard plenty of buzz in mortgage modeling circles that prepay models are running too fast right now. Some may already be dialing them down and pricing in slower speeds.Keithhttps://www.blogger.com/profile/15217923679078743519noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-64360926321998990912008-07-23T06:59:00.000-05:002008-07-23T06:59:00.000-05:00As for the IO, that sounds right to me. I don't fo...As for the IO, that sounds right to me. I don't follow IO trading very much, so I can't speak to what's priced in vs. what isn't.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-78266871023208730082008-07-23T06:53:00.000-05:002008-07-23T06:53:00.000-05:00OAS! What?!?!? Never heard of it!Actually, I've sp...OAS! What?!?!? Never heard of it!<BR/><BR/>Actually, I've spent 10-years in the bond market, so I'm pretty familiar with OAS. And I could write a book on how much I hate OAS as a measure of MBS value. <BR/><BR/>My argument in the post would be even stronger if I made it on an OAS basis. Because extension would cause the option value to <I>de facto</I> decline, but since the OAS model is strictly interest rate based, its not going to understand that at all.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-22591699794052590832008-07-22T23:01:00.000-05:002008-07-22T23:01:00.000-05:00In MBS land there is concept called OAS. Option ad...In MBS land there is concept called OAS. Option adjusted spread. you would need to find out what it is. OAS is solved using monte-carlo simulations on term-structure of interest rates. So, you would also need a good prepayment model to change as term structure changes. Finding what the OAS will get you an idea of how high the option cost is? option cost to refinance/relocate, etc. <BR/>In your example, if 270bps is the spread. Your OAS could be 210bps. So, option cost is 60bps.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-10602516269795434592008-07-22T16:51:00.000-05:002008-07-22T16:51:00.000-05:00The best plays in MBS are securities where extensi...<I>The best plays in MBS are securities where extension risk is limited.</I><BR/><BR/>What about interest only strips? Have they increased in value. If people are going to be stuck with the loans a lot longer it makes me think that IO faucet wont turn off as quickly as the models might predict....nadeshttps://www.blogger.com/profile/08342800035327545420noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-50027403486289185332008-07-22T13:16:00.000-05:002008-07-22T13:16:00.000-05:00S'interesting. Before the current crunch my most i...S'interesting. Before the current crunch my most intimate knowledge of structured finance came from a bit of time following the European corporate CLO and whole business securitization market and Liar's Poker. Michael Lewis went on at length about prepayment rates being the most difficult thing for traders to get their heads round, but it's really taken a back seat to credit quality in the current market.<BR/><BR/>And did you notice the FSA review from Moody's? There's a bit of a mention about the investment and insurance portfolio, but also "material shifts in the demand function for financial guarantees, and the potential sensitivity of the company's franchise".<BR/><BR/>Which is their way of saying that the entire monoline business might not make sense after all. <BR/><BR/>I've spent much too long trying to say that the monolines' troubles have everything to do with a few lapses in underwriting discipline, and that their business has a sensible rationale. That rationale, however, presupposes the ratings agencies being both sensible and credible. They're neither right now.Gringcorphttps://www.blogger.com/profile/09254777209701028458noreply@blogger.com