Dollar Roll Financing in the TBA Market

TBA trading gave rise to the dollar roll as a mechanism for dealers to borrow pass-throughs they had sold short. In fact, a dollar roll is a contract to buy an amount of TBA pass-throughs for a close delivery date and sell the same amount of the same pass-throughs back for a more distant delivery date. Similar to a Treasury repo trade, the difference in buy-sell prices the drop implies a cost-of-carry or financing rate, given a prepayment assumption. This expected financing rate, then, is...

External Credit Enhancements

External credit enhancements come in the form of third-party guarantees that provide for first-loss protection against losses up to a specified amount. Historically, the most common forms of external credit enhancements have been 1 a letter of The author is grateful to Bill Berliner and Jonathan Lieber of Countrywide Securities Brian Grow, Ray Morel, and Weili Chen of Standard amp Poor's and Patrick Fitzsimonds of UBS for their helpful comments. credit, 2 bond insurance, and 3 pool insurance. A...

Risks Associated With Mortgages And

Mbs Convexity

Holders of fixed income investments ordinarily deal with interest-rate risk, or the risk that changes in the level of market interest rates will cause fluctuations in the market value of such investments. Under most circumstances, interest-rate risk can be hedged through either the cash or derivative markets. Mortgages and associated MBS, however, have additional risks associated with them that are unique to the products and require additional analysis. In the following discussion for the sake...

Internal Credit Enhancements

Internal credit enhancements come in more complicated forms than external credit enhancements and may alter the cash-flow characteristics of the loans even in the absence of default. Credit enhancement levels i.e., the amount of subordination for each form of enhancement used within a deal are determined by the rating agencies from which the issuer seeks a rating for the tranches. This is referred to as sizing the transaction and is based on the rating agencies' expectations for the performance...