During the mid-2000s when nontraditional mortgage securitizations helped fuel the credit crisis, investors worldwide piled into residential mortgage-backed credit derivatives (RMBS, CDO, ABS) because the spreads above Treasuries were several points and the securities were highly rated by the rating agencies. Institutional investors, oftentimes pension funds and insurance companies, generally did not perform independent fundamental analysis on the mortgage collateral underlying the securities they were purchasing.
This session opens with discussion about non-agency mortgage securitization and segues into an actuarial approach to projecting future cash flows related to residential mortgage-backed credit derivatives. The fundamental approach begins with an analysis of the underlying collateral that explicitly reflects both underwriting characteristics and key economic indicators (home price appreciation and interest rates) as well as aggregate performance methods. The investors'' cash flows are then projected using the actuarially derived modeling assumptions and credit derivative waterfall schemes.