Mortgage Backed Securities (MBS) are among the most complex of all financial instruments. Analysis of MBS requires blending empirical analysis of borrower behavior with mathematical modeling of interest rates and home prices. Over the past 25 years, Davidson and Levin have been at the leading edge of MBS valuation and risk analysis. Mortgage Valuation Models: Embedded Options, Risk and Uncertainty is a detailed description of the sophisticated theories and advanced methods that the authors employ in real-world analysis of mortgage backed securities. Issues such as complexity, borrower options, uncertainty, and model risk play a central role in their approach to valuation of MBS. The book describes methods for modeling prepayments and defaults of borrowers. It explores closed form, backward induction and Monte Carlo valuation using the Option-Adjusted-Spread (OAS) approach, explains the origin of OAS and its relationship to model uncertainty. With reference to the classical CAPM and APT, the book advocates extending the concept of risk-neutrality to modeling home prices and borrower options, well beyond interest rates. The coverage spans the range of mortgage products from loans, TBA (to be announced) pass-through securities to subordinate tranches of subprime-mortgage securitizations and describes valuation methods for both agency and non-agency MBS including pricing new loans; Davidson and Levin put forth new approaches to prudent risk measurement, ranking, and decomposition that can help guide traders and risk managers. It reveals quantitative causes of the 2007-09 financial crisis and provides insights into the future of the US housing finance system and mortgage modeling. Despite the advances in mortgage modeling and valuation, this remains an ever-evolving field. Mortgage Valuation Models will serve as a foundation for the future development of models for mortgage-backed securities.
Introduction ; Part 1 Fundamentals of MBS Risk and Valuation ; Chapter 1 Dimensions of Uncertainty ; Chapter 2 Fundamentals of Securitization ; Chapter 3 Investors in Mortgage-Backed Securities ; Chapter 4 Valuation with Risk Factors and Risk Neutrality ; Chapter 5 Short-Rate Term-Structure Modeling ; Chapter 6 Risk-Neutral Modeling Using Forward and Futures Prices ; Part 2 Modeling and Valuation of Agency MBS ; Chapter 7 Agency Pool Prepayment Models ; Chapter 8 Engineering of Valuation Models without Simulations ; Chapter 9 Monte Carlo Methods ; Chapter 10 Applications of the OAS Valuation Approach to Agency MBS ; Chapter 11 Prepayment Risk Neutrality (the concept of prOAS) ; Part 3 Modeling and Valuation of Non-Agency MBS ; Chapter 12 Loan Level Modeling of Prepayment and Default ; Chapter 13 The Concept of Credit OAS ; Chapter 14 Empirical Modeling of Home Prices ; Chapter 15 Credit Analysis on a Scenario Grid and Analytical Shortcuts ; Part 4 Analysis of the 2008-2009 Financial Crisis ; Chapter 16 Lesson #1: The Role of Financing and Affordability in the Formation of Housing Prices ; Chapter 17 Lesson #2: The CDO Calamity and Six Degrees of Separation ; Chapter 18 Lesson #3: Fair versus Intrinsic Valuation under Market Duress ; Part 5 Building a Healthy Housing Finance System ; Chapter 19 How to Measure Risk, Rank Deals and Set Aside Capital ; Chapter 20 How to Price New Loans ; Chapter 21 The Future of Housing Finance and MBS Modeling ; References
