Senior/Subordinate structure is an increasingly popular form of mortgage-backed security. It involves creating different classes of securities so that investors in the more senior classes of securities have priority over the investors in the subordinate classes. Losses on the loans would first affect investors in the lower priority subordinate securities, and typically senior securities receive prepaid principal sooner. Reflecting their respective credit risk, the senior securities would usually receive the highest credit ratings and offer the lowest yields to investors, while the subordinate classes would be rated below that and offer higher yields to investors. The result is a variety of products with a total value greater than you would see in a single-class mortgage pass-through security.
MIAC first introduced a tool to value senior sub deals and their residuals in 1996. MIAC has used this tool for many very different structures for its clients during this time. In the last year, MIAC has been retooling its senior sub application to expand its flexibility and power to offer better analytics on a wider range of structures.
The strength of MIAC’s Senior/Subordinate is that it works with the same mortgage portfolios used by MIAC’s WinOAS. The same loan, prepayment, and default settings used to value the mortgage loans in WinOAS are used to simulate the collateral payments in the Senior Sub tool. The effort applied to valuing the mortgage assets does not have to be repeated when it is time to value the deal’s residual.
Some of the new features that come with the senior sub redesign are:
- A more flexible deal structure that supports deals of greater complexity than before including:
- Amortizing swaps and caps
- NIM (net interest margin) bond support
- IO (interest only) bonds support
- Collateral groups support: ability to map collateral to specific class groups
- Lock-out bond support
- A “rule engine” that enables MIAC to create and deliver new types of payment rules easily, allowing us to customize the tool to a client’s needs:
- Ability to create and modify any trigger events
- Senior Enhancement Percentage, Rolling Delinquency, Cumulative foreclosure
- Reverse turbo rules for subordinate classes
- Ability to adjust pre step-down and step-down OC target levels
- Pro rata principal distribution
- Cross-collateralization support
- Target percentage for subordinate classes
- Cash Account support
- Net WAC cap support
- Ability to direct prepay penalty cash flows to various parties such as servicer or residual holder
- Support for multiple deals, and pricing of multiple cash flows within a deal in a single portfolio. Ability to select cash flows to be displayed for collateral as well as for the structure.
- Support for third-party prepay models, such as ADCO, AFT., etc.
- Support collateral cash flows modeling on loan and rep-line levels
- Ability to generate structured cash flows under different forward curve scenarios
Full compatibility with MIAC’s other tools, including VAST, our powerful scenario tool that can run valuation under prospective and retrospective interest rate scenarios and manipulate asset prepayment, default, and yield assumptions |
