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Mortgage Backed Securities (MBS)
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Mortgage-backed securities include structural amortization of principal, both scheduled, and at the discretion of other parties. They are backed by the collateral of the unpaid principal balance of pools of mortgage loans, and typically (though not necessarily) contain structure intended to pass through loan behavior and performance.
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Typically, loans are pooled according to similarity. Pools are enhanced, and the loans within them sometimes managed, by an insuror/guarantor. Securitized and unitized securities are then contractually built from these pools, with various objectives in mind. Frequently they have complex and hard to value features included, such as cross-pool callability of principal under arbitrary circumstances, and so on. Existing registered securities (e.g. with CUSIP or other market identification) must be kept track of, and valued in light of impacts from all other such registered securities, on a scenario-by-scenario basis, using a Monte Carlo or equivalent pathwise approach.
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FiSC has common loan-level and pool-level structural tools, in stdfin, for calculating contingent scheduled cash flows, and a full-featured stochastic process scenario sampling toolkit, stdsim, which can be based on random walk pumped into your own econometric models, or defaulted to a simple Monte Carlo method. The scenarios can be used to drive your own in-house borrower prepay and/or default models, or they can be exported to an industry standard prepayment model system like AD or AFT, or a CMO tracking service/product like Intex, or an MBS valuation platform, like Polypaths.
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All of these products have many baked-in commodity features like those in stdfin. But they are all closed code that you must assure (if you do any financial reporting) "black box" style, usually by interns and the least experienced business front-line staff you can deploy for this costly and tedious QA function. Our code can be seen and touched, intermediate calculations checked, etc, for results that can be examined and assured to any depth by external auditors. Transparency is free of charge.
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