a risk management model for mbs issuers.pdf

A Risk Management Model for MBS Issuers 169 INTERNATIONAL REAL ESTATE REVIEW 2002 Vol. 5 No. 1: pp. 169 - 195 A Risk Management Model for MBS Issuers Eddie Lam Assistant Vice President of CITIC Ka Wah Bank and Consultant of the Korea Mortgage Corporation, eddielam@ Most previous studies that developed Mortgage-backed Securities (MBS) models focused on investors, but the model that is presented here is specifically for MBS issuers. I developed a risk management tool for issuers and guarantors to monitor their MBS portfolios. The model projects the cash inflow of mortgages and the cash outflow to MBS; alters the traditional model by introducing decision trees; combines the prepayment, delinquency, default, and recovery of delinquency into a single model; and uses a simulation program with multiple path generation to develop a model for issuers to manage their MBS portfolios. According to the results of the model, issuers can manage the risk level of their portfolios by determining the Collection Account Balance, the Overcollateralization Ratio, the Net Residual Value, and the Liquidity Advance. The final part of this paper provides suggestions on risk management for MBS issuers. Keywords Mortgage-backed securities, risk management, MBS issuers, cash flow projection, Korea Mortgage Corporation Introduction The market for mortgage-backed securities (MBS) has experienced more rapid growth in size and complexity than any other fixed-income market in recent years. Since the earliest MBS transaction of the Government National Mortgage Association (Ginnie Mae) in early 1970s, various MBS have been issued by quasi-government agencies such as the Federal Home Loan Mortgage Corporation (Freddie Mac