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MFA Financial, Inc. Message Board

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  • reitsbyziggy reitsbyziggy Feb 21, 2010 10:16 AM Flag

    GSE Prepayment Effects

    Thanks for the excellent reply! Its not surprising I guess that they would do something so uneconomic for appearance sake. So now in the future MBS investors will be more concerned about the quality of their holdings because prepayment speeds will become more sensitive to non performing loans.

    I've got another question for you and forgive me for trying to take advantage of your insight/knowledge. MFA indicates that their non agency holdings have "structural credit enhancements". What do they mean by structural credit enhancements? Is that the PMI payoff for the remaining unpaid balance over 80% of original appraised value or do they mean there are tranches in the MBS pool that are subordinate to MFA's position? Thanks again.

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    • You're welcome. It means the latter "...there are tranches in the MBS pool that are subordinate to MFA's position."

      If I remember right MFA bought the AAA tranches, which means there are four or so subordinate trances providing credit enhancement to the AAA. Think of cascading waterfalls of principal and cascading waterfalls of interest.

      I am no expert on this but the way I understand interest waterfalls is that the subordinate tranches only get whats left only if the AAA is getting paid it's full WAC. To understand this use an example from equities, it is similar in effect to the fact that no common dividend may be paid at all unless the preferred dividend is paid in full, and even further up the food chain, no preferred dividend may be declared unless the bond coupons are getting paid in full. In MBS, this structure enhances the credit quality of the AAA at the expense of the credit quality of the lower tranches. Principal waterfalls are similar, every scheduled principal payment, as well as every principal prepayment, goes directly to the AAA holders until all of the AAA's principal has been paid in full before the lower tranches get any principal back at all.

      Again I am no expert. I recommend reading googling and reading the ppt presentation "Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios" That's basically where I learned this stuff.

      • 1 Reply to taymere_lane
      • "If I remember right MFA bought the AAA tranches, which means there are four or so subordinate trances providing credit enhancement to the AAA. Think of cascading waterfalls of principal and cascading waterfalls of interest."

        I read the PP presentation as you sugessted. MFA indicated at year end they had 10% in credit enhancements. That could be 10% of par or 10% of their basis(which would equate to approx 6.3% of par). Either way that isn't much cushion to bring them up to a AAA tranche. Of course I don't know anything about the relative sizes of the various tranches.

 
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