I wonder when banks got out of the business of making loans, and go into everything else. I also wonder, why bankers are so fee crazy that they charge themselves. I guess it is a way to scratch each others' back.
Citogroupis planning to overhaul its bonus system for hundreds of top managers in an effort to increase co-operation and minimise in-fighting among the disparate parts of the sprawling financial services conglomerate.
The move is part of an ambitious plan by Vikram Pandit, chief executive, to restore Citi’s battered fortunes by harnessing synergies between its investment banking, commercial banking and wealth management divisions.
Citi is the latest Wall Street bank to rethink its bonus system in the wake of the credit crunch. However, while firms such as Merrill Lynch are trying to reduce incentives for bankers to take short-term risks and outsized bets, Citi’s efforts are mainly aimed at getting the most out of its huge and diverse business.
Since taking over from Chuck Prince in December, Mr Pandit has rebuffed calls to break up Citi and vowed to eliminate barriers between the company’s businesses to fully exploit its “universal banking” model.
“The new compensation plan is absolutely crucial to put teeth behind Vikram Pandit’s strategy,” a Citi executive said. “We have to put a premium on partnership-like behaviour.”
People close to the situation said Mr Pandit wanted to change the way bonuses were calculated to reward co-operation across different divisions and the performance of the company as a whole.
At present, bonuses at Citi, like those at most other banks, are largely dependent on the results of a manager’s division and individual performance.
People familiar with the matter said the ultimate goal was to link bonuses of senior managers and junior employees to Citi’s overall performance. However, they added that the first stage was likely to involve skewing bonuses to take into account how much shared business each manager generated.
Citi employees already get paid for referrals, when, for example, a wealth management adviser helps a client open a credit card or a checking account. However, Citi insiders say those sums are modest.
A change to Citi’s compensation structure could face internal resistance. Many senior managers may object to having their pay tied to businesses outside their control, especially when they are as volatile and cyclical as investment banking.
However, Mr Pandit has told senior colleagues he wants a new system in place by the end of the year, when annual bonuses are decided. John Donnelly, head of human resources, has been asked to draft detailed plans during the next few weeks.
Sunday, June 29, 2008
Monday, June 23, 2008
Collateralized Mortgage Obligations Part 2
This CMO glossary defines terms used in quotes in the text and additional terms that may be helpful to an investor considering an investment in CMOs.
Accretion bond:
See”Z-tranche.”
Accrual bond:
See “Z-tranche.”
Accrued interest:
Interest deemed to be earned on a security but not yet paid to the investor.
Active tranche:
A CMO tranche that is currently paying principal payments to investors.
Amortization:
Liquidation of a debt through installment payments.
Average life:
On a mortgage security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.
Basis point:
One-one hundredth (1/100 or .01) of one percent. Yield differences among bonds are stated in basis points.
Beneficial owner:
One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank (“street name”).
Bid:
The price at which a buyer is willing to buy a security.
Bond equivalent yield:
An adjustment to a CMO yield which reflects its greater present value, created because CMOs pay monthly or quarterly interest, as opposed to semiannual interest payments on most other types of bonds.
Book-entry:
A method of recording and transferring ownership of securities electronically, thereby eliminating the need for physical certificates.
Call risk:
For a CMO, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.
Cap:
The upper limit for the interest rate on an adjustable-rate loan or security.
Clean CMO:
See “Sequential-pay CMO.”
CMO (Collateralized Mortgage Obligation):
A multi-class bond backed by a pool of mortgage pass-through securities or mortgage loans. See “REMIC.”
CMT (Constant Maturity Treasury):
A series of indexes of various maturities (one, three, five, seven, or ten years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.
COFI (Cost of Funds Index):
A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.
Collateral:
Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, although it may also encompass letters of credit, insurance policies, or other credit enhancements.
Companion tranche:
A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.
Confirmation:
A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.
Conventional mortgage loan:
A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.
CPR (Constant Prepayment Rate):
The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.
Current face:
The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.
CUSIP number:
A unique nine-digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded security at the time of issuance. If the security is in physical form, the CUSIP number is printed on its face.
Extension risk:
For a CMO, the risk that rising interest rates may slow the anticipated prepayment speeds, causing investors to find their principal committed longer than expected. As a consequence, they may miss the opportunity to earn a higher rate of interest on their money.
Face value:
The par value of a security, as distinct from its market value.
Factor:
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security which changes over time in relation to its original principal value. The Bond Buyer publishes the “Monthly Factor Report.” which contains a list of factors for Ginnie Mae, Fannie Mae and Freddie Mac securities. Fannie Mae, Freddie Mac and trustees of private-label CMOs also publish CMO tranche factors.
Floating-rate CMO:
A CMO tranche which pays an adjustable rate of interest tied to a representative interest index such as the London Interbank Offered Rate Z1BOR), the Constant Maturity Treasury (CMI) or the t f Funds Index (COFI).
Floor:
The lower limit for the interest rate on an adjustable-rate loan or security.
Hedge:
A commitment or investment made with the intention of minimizing the impact of adverse movements interest rates or securities prices and offsetting potential losses.
Inverse floater:
A CMO tranche that pays an adjustable rate of interest that moves in the opposite direction from movements in a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI).
I0 (interest-only) security:
In the case of a CMO, an IO tranche is created deliberately to pay investors only interest and not principal. I0 securities are priced at a deep discount to the “notional” amount of principal used to calculate the amount of interest due.
Issue date:
The date on which a security is deemed to he issued or originated.
Issuer:
An entity which issues and is obligated to pay amounts due on securities.
Jump Z-tranche:
A Z-tranche that may start receiving principal payments before prior tranches are retired if market forces create a “triggering” event, such as a drop in Treasury yields to a defined level, or a prepayment experience that differs from assumptions by a specific margin. “Sticky” jump Z-tranches maintain their changed payment priority until they are retired. “Non- sticky” jump Z-tranches maintain their priority only temporarily for as long as the triggering event is present. Although jump Z-tranches are no longer issued, some still trade in the secondary market.
LIBOR (London Interbank Offered Rate):
The interest rate banks charge each other for short-term Eurodollar loans ranging from overnight to five years in maturity.
Lockout:
The period of time before a CMO investor will begin receiving principal payments.
Maturity date:
The date on which the principal amount of a security is due and payable.
Mortgage:
A legal instrument that creates a lien upon real estate securing the payment of a specific debt.
Mortgage loan:
A loan secured by a mortgage.
Mortgage pass-through security:
A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis. Mortgage pass-through securities are also known as mortgage-backed securities (MBS) and participation certificates (PC).
Negative convexity:
A characteristic of CMOs and other callable or pre-payable securities that causes investors to have their principal returned sooner than expected in a declining interest rate environment or later than expected in a rising interest rate environment. In the former scenario, investors may have to reinvest their funds at lower rates (“call risk”); in the latter, they may miss an opportunity to earn higher rates (“extension risk”).
Offer:
The price at which a seller will sell a security.
Original Face:
The face value or original principal amount of a security on its issue date.
PAC (planned amortization class) tranche:
A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed a PAC bond is transferred to a companion tranche.
Par:
A price equal to the original face amount of a securities as distinct from its market value. On a debt security, the par or face value is the amount the investor has been promised to receive from the issuer at maturity.
Payment date:
The date that principal and interest payments are paid to the record owner of a security.
P&I (principal and interest):
The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.
Plain-vanilla CMO:
See “Sequential-pay CMO.”
PO (principal-only) security:
In the case of a CMO, a P0 tranche is created deliberately to pay investors principal only and not interest. P0 securities are priced at a discount from their face value.
Pool:
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage- pass-through securities, pools are identified by a number assigned by the issuing agency.
Prepayment:
The unscheduled partial or complete payment the principal amount outstanding on a mortgage or other debt before it is due.
Price:
The dollar amount to be paid for a security, which also be stated as a percentage of its face value or par in case of debt securities.
Principal
With mortgage securities, the amount of debt outstanding on the underlying mortgage loans.
Private label:
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions, or home builders.
Ratings:
Designations used by investors’ services to give relative indications of credit quality.
Record date:
The date for determining the owner entitled to the next scheduled payment of principal or interest in a mortgage security.
REMIC:
Real Estate Mortgage Investment Conduit. As a result of a change in the 1986 Tax Reform Act, most CMOs are today issued in REMIC form to create certain tax advantages for the issuer. The terms “REMIC” and “CMO” are now used interchangeably.
Residual:
In a CMO, the residual is that tranche which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.
Scenario analysis:
Examining the likely performance of an investment under a wide range of possible interest rate environments.
Sequential-pay CMO:
The most basic type of CMO, in which all tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.
Servicing:
Collection and pooling of principal, interest, and escrow payments on mortgage loans and mortgage pools, as well as certain operational procedures such as accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, and loan analysis. The party providing the servicing receives a servicing fee.
Servicing fee:
The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.
Settlement date:
The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds.
Sinking fund:
Money set aside on a regular basis, sometimes from current earnings, for the specific purpose of redeeming debt.
SMM (Single Monthly Mortality):
The percentage of outstanding mortgage loan principal that prepays in one month.
Standard Prepayment Model of The Bond Market Association:
A model based on historical mortgage prepayment rates that is used to estimate prepayment rates on mortgage securities. The Association’s model is based on the Constant Prepayment Rate (CPR), which annualizes the Single Monthly Mortality (SMM), or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as “percentage of PSA” (Prepayment Speed Assumptions). A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month, 0.4% CPR in the second month, 0.6°o CPR in the third month, and 0.2% increases in every month thereafter until the thirtieth month, when the rate reaches 6%. From the thirtieth month until the mortgage loan reaches maturity, 100% PSA equals 6% CPR.
Super PO:
A principal-only security structured as a companion bond.
Superfloater:
A floating-rate CMO tranche whose rate based on a formulaic relationship to a representative interest rate index.
Support tranche:
See “Companion tranche.”
TAC trcanche:
Targeted amortization class tranche. A TAC tranche uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.
Toggle tranche:
See “Jump Z-tranche.”
Tranche:
A class of bonds in a CMO offering which shares the same characteristics. “Tranche” is the French word for “slice.”
Transfer agent:
A party appointed to maintain records of securities owners, to cancel and issue certificates and to address issues arising from lost, destroyed, or stolen certificates.
Trustee:
An individual or institution that holds assets for the benefit of another.
Weighted average coupon (WAC):
The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.
Weighted average loan age (WALA):
The weighted average number of months since the date of the loan origination of the mortgages in a mortgage pass- through security pool issued by Freddie Mac, weighted by the size of the principal loan balances.
Weighted average maturity (WAM):
The weighted average number of months to the final payment of each loan backing a mortgage security, weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARIVI) and weighted average remaining term WART.
Window:
In a CMO bond, the period of time between the expected first payment of principal and the expected last payment of principal.
Yield:
The annual percentage rate of return earned on a security, as computed in accordance with standard industry practices. Yield is a function of a security’s purchase price and interest rate.
Z-tranche:
Often the last tranche in a CMO, the Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.
Copyright 2006. The Bond Market Association. Reprinted with permission.
Accretion bond:
See”Z-tranche.”
Accrual bond:
See “Z-tranche.”
Accrued interest:
Interest deemed to be earned on a security but not yet paid to the investor.
Active tranche:
A CMO tranche that is currently paying principal payments to investors.
Amortization:
Liquidation of a debt through installment payments.
Average life:
On a mortgage security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.
Basis point:
One-one hundredth (1/100 or .01) of one percent. Yield differences among bonds are stated in basis points.
Beneficial owner:
One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank (“street name”).
Bid:
The price at which a buyer is willing to buy a security.
Bond equivalent yield:
An adjustment to a CMO yield which reflects its greater present value, created because CMOs pay monthly or quarterly interest, as opposed to semiannual interest payments on most other types of bonds.
Book-entry:
A method of recording and transferring ownership of securities electronically, thereby eliminating the need for physical certificates.
Call risk:
For a CMO, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.
Cap:
The upper limit for the interest rate on an adjustable-rate loan or security.
Clean CMO:
See “Sequential-pay CMO.”
CMO (Collateralized Mortgage Obligation):
A multi-class bond backed by a pool of mortgage pass-through securities or mortgage loans. See “REMIC.”
CMT (Constant Maturity Treasury):
A series of indexes of various maturities (one, three, five, seven, or ten years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.
COFI (Cost of Funds Index):
A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.
Collateral:
Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, although it may also encompass letters of credit, insurance policies, or other credit enhancements.
Companion tranche:
A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.
Confirmation:
A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.
Conventional mortgage loan:
A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.
CPR (Constant Prepayment Rate):
The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.
Current face:
The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.
CUSIP number:
A unique nine-digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded security at the time of issuance. If the security is in physical form, the CUSIP number is printed on its face.
Extension risk:
For a CMO, the risk that rising interest rates may slow the anticipated prepayment speeds, causing investors to find their principal committed longer than expected. As a consequence, they may miss the opportunity to earn a higher rate of interest on their money.
Face value:
The par value of a security, as distinct from its market value.
Factor:
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security which changes over time in relation to its original principal value. The Bond Buyer publishes the “Monthly Factor Report.” which contains a list of factors for Ginnie Mae, Fannie Mae and Freddie Mac securities. Fannie Mae, Freddie Mac and trustees of private-label CMOs also publish CMO tranche factors.
Floating-rate CMO:
A CMO tranche which pays an adjustable rate of interest tied to a representative interest index such as the London Interbank Offered Rate Z1BOR), the Constant Maturity Treasury (CMI) or the t f Funds Index (COFI).
Floor:
The lower limit for the interest rate on an adjustable-rate loan or security.
Hedge:
A commitment or investment made with the intention of minimizing the impact of adverse movements interest rates or securities prices and offsetting potential losses.
Inverse floater:
A CMO tranche that pays an adjustable rate of interest that moves in the opposite direction from movements in a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI).
I0 (interest-only) security:
In the case of a CMO, an IO tranche is created deliberately to pay investors only interest and not principal. I0 securities are priced at a deep discount to the “notional” amount of principal used to calculate the amount of interest due.
Issue date:
The date on which a security is deemed to he issued or originated.
Issuer:
An entity which issues and is obligated to pay amounts due on securities.
Jump Z-tranche:
A Z-tranche that may start receiving principal payments before prior tranches are retired if market forces create a “triggering” event, such as a drop in Treasury yields to a defined level, or a prepayment experience that differs from assumptions by a specific margin. “Sticky” jump Z-tranches maintain their changed payment priority until they are retired. “Non- sticky” jump Z-tranches maintain their priority only temporarily for as long as the triggering event is present. Although jump Z-tranches are no longer issued, some still trade in the secondary market.
LIBOR (London Interbank Offered Rate):
The interest rate banks charge each other for short-term Eurodollar loans ranging from overnight to five years in maturity.
Lockout:
The period of time before a CMO investor will begin receiving principal payments.
Maturity date:
The date on which the principal amount of a security is due and payable.
Mortgage:
A legal instrument that creates a lien upon real estate securing the payment of a specific debt.
Mortgage loan:
A loan secured by a mortgage.
Mortgage pass-through security:
A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis. Mortgage pass-through securities are also known as mortgage-backed securities (MBS) and participation certificates (PC).
Negative convexity:
A characteristic of CMOs and other callable or pre-payable securities that causes investors to have their principal returned sooner than expected in a declining interest rate environment or later than expected in a rising interest rate environment. In the former scenario, investors may have to reinvest their funds at lower rates (“call risk”); in the latter, they may miss an opportunity to earn higher rates (“extension risk”).
Offer:
The price at which a seller will sell a security.
Original Face:
The face value or original principal amount of a security on its issue date.
PAC (planned amortization class) tranche:
A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed a PAC bond is transferred to a companion tranche.
Par:
A price equal to the original face amount of a securities as distinct from its market value. On a debt security, the par or face value is the amount the investor has been promised to receive from the issuer at maturity.
Payment date:
The date that principal and interest payments are paid to the record owner of a security.
P&I (principal and interest):
The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.
Plain-vanilla CMO:
See “Sequential-pay CMO.”
PO (principal-only) security:
In the case of a CMO, a P0 tranche is created deliberately to pay investors principal only and not interest. P0 securities are priced at a discount from their face value.
Pool:
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage- pass-through securities, pools are identified by a number assigned by the issuing agency.
Prepayment:
The unscheduled partial or complete payment the principal amount outstanding on a mortgage or other debt before it is due.
Price:
The dollar amount to be paid for a security, which also be stated as a percentage of its face value or par in case of debt securities.
Principal
With mortgage securities, the amount of debt outstanding on the underlying mortgage loans.
Private label:
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions, or home builders.
Ratings:
Designations used by investors’ services to give relative indications of credit quality.
Record date:
The date for determining the owner entitled to the next scheduled payment of principal or interest in a mortgage security.
REMIC:
Real Estate Mortgage Investment Conduit. As a result of a change in the 1986 Tax Reform Act, most CMOs are today issued in REMIC form to create certain tax advantages for the issuer. The terms “REMIC” and “CMO” are now used interchangeably.
Residual:
In a CMO, the residual is that tranche which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.
Scenario analysis:
Examining the likely performance of an investment under a wide range of possible interest rate environments.
Sequential-pay CMO:
The most basic type of CMO, in which all tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.
Servicing:
Collection and pooling of principal, interest, and escrow payments on mortgage loans and mortgage pools, as well as certain operational procedures such as accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, and loan analysis. The party providing the servicing receives a servicing fee.
Servicing fee:
The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.
Settlement date:
The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds.
Sinking fund:
Money set aside on a regular basis, sometimes from current earnings, for the specific purpose of redeeming debt.
SMM (Single Monthly Mortality):
The percentage of outstanding mortgage loan principal that prepays in one month.
Standard Prepayment Model of The Bond Market Association:
A model based on historical mortgage prepayment rates that is used to estimate prepayment rates on mortgage securities. The Association’s model is based on the Constant Prepayment Rate (CPR), which annualizes the Single Monthly Mortality (SMM), or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as “percentage of PSA” (Prepayment Speed Assumptions). A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month, 0.4% CPR in the second month, 0.6°o CPR in the third month, and 0.2% increases in every month thereafter until the thirtieth month, when the rate reaches 6%. From the thirtieth month until the mortgage loan reaches maturity, 100% PSA equals 6% CPR.
Super PO:
A principal-only security structured as a companion bond.
Superfloater:
A floating-rate CMO tranche whose rate based on a formulaic relationship to a representative interest rate index.
Support tranche:
See “Companion tranche.”
TAC trcanche:
Targeted amortization class tranche. A TAC tranche uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.
Toggle tranche:
See “Jump Z-tranche.”
Tranche:
A class of bonds in a CMO offering which shares the same characteristics. “Tranche” is the French word for “slice.”
Transfer agent:
A party appointed to maintain records of securities owners, to cancel and issue certificates and to address issues arising from lost, destroyed, or stolen certificates.
Trustee:
An individual or institution that holds assets for the benefit of another.
Weighted average coupon (WAC):
The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.
Weighted average loan age (WALA):
The weighted average number of months since the date of the loan origination of the mortgages in a mortgage pass- through security pool issued by Freddie Mac, weighted by the size of the principal loan balances.
Weighted average maturity (WAM):
The weighted average number of months to the final payment of each loan backing a mortgage security, weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARIVI) and weighted average remaining term WART.
Window:
In a CMO bond, the period of time between the expected first payment of principal and the expected last payment of principal.
Yield:
The annual percentage rate of return earned on a security, as computed in accordance with standard industry practices. Yield is a function of a security’s purchase price and interest rate.
Z-tranche:
Often the last tranche in a CMO, the Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.
Copyright 2006. The Bond Market Association. Reprinted with permission.
Sunday, June 22, 2008
Collateralized Mortgage Obligations Part 1
Lately it seems that you can not turn on the evening news, or open a newspaper without hearing about the housing market and the poor economy. One of the factors that has lead to the credit crunch here in the USA is the issuance of bonds that are backed by mortgages. Basically, if a bond is issued based on a homeowners ability to pay, and then the homeowner never pays then the bond insurance company is forced to step in. These bonds are cheap, but not very liquid right now because the market for them has tanked.
With all of the bad news, it seems that we at Landes have developed a niche for these bonds. In fact we have seen so many over the past few months that if I never see another CMO, it will be too soon. All of that aside, I feel like its a good idea to explain what CMOs are.
In 1983, the introduction of Collateralized Mortgage Obligations (CMOs) by the Federal Home Loan Mortgage Corporation established a new investment vehicle for investors not traditionally involved in the mortgage market. The Tax Reform Act of 1986 authorized the establishment of Real Estate Mortgage Investment Conduit (REMICs) which provided monthly pay possibilities to investors and a tax advantage to issuers. For investment purposes, REMIC securities are indistinguishable from CMOs. Today, virtually all CMOs issued are actually REMICs. The CMO market has grown to hundreds of billions of dollars in size since its inception in 1983 and today accounts for an ever increasing and important segment of the overall mortgage market. Please contact us for information on CMOs and how they react to different market conditions.
What are CMOs?
CMOs are multi-class bonds that are collateralized by mortgage backed securities such as Ginnie Maes (Government National Mortgage Association), Fannie Maes (Federal National Mortgage Association), Freddie Macs (Federal Home Loan Mortgage Corporation), or by whole loan mortgages. The cash flows generated by the collateral are used to pay principal and interest to the CMO bondholder.
Who Issues CMOs?
CMOs are most often issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), both government sponsored corporations. While FHLMC and FNMA dominate the new issue market, many private issuers regularly bring CMOs to market also.
What are the Benefits of CMOs?
CMOs may offer substantially higher yield than other securities with comparable credit quality. Each CMO issue offers a variety of different maturities, allowing investors to choose the class that best meets their investment objectives. CMOS also have market risk and a risk of pre-payment.
Wednesday, June 18, 2008
Reginal Divide
Bancorp (NasdaqGS:FITB), a large U.S. regional bank, said on Wednesday it plans to raise at least $2 billion of capital and will slash its dividend by 66 percent to cope with mounting credit losses.
Shares of Fifth Third fell $1.78, or 14 percent, to $10.95 in pre-market trading.
The bank, the second-largest based in Ohio, joins a growing number of rivals to raise capital and slash their dividends this year, including National City Corp (NYSE:NCC - News) and KeyCorp (NYSE:KEY - News), the state's largest and third-largest banks.
Ohio has been among the states hardest hit by the nation's housing slump. Fifth Third is based in Cincinnati, while National City and KeyCorp are based in Cleveland.
Fifth Third said it expects to issue $1 billion of convertible preferred shares and raise at least $1 billion more by selling non-core businesses in the next several quarters.
It also said it will cut its quarterly dividend to 15 cents per share from 44 cents.
"We expect these actions to enable us to weather further depreciation in home prices as well as a significant weakening in economic activity," Chief Executive Kevin Kabat said in a statement. "Our bottom-line results won't meet our expectations. We are not satisfied."
The bank was not immediately available for further comment.
Fifth Third said the moves will help it boost its Tier-1 capital ratio, a measure of its ability to cover losses, to 8.5 percent, above the 6 percent that regulators say reflects a "well-capitalized" bank.
It said it expects net charge-offs to equal 1.6 percent to 1.65 percent of loans and leases in 2008, and a higher percentage in 2009. It expects to set aside $350 million to $375 million more in the second quarter than actual net charge-offs, and that its provisioning will also exceed charge-offs in 2009.
Fifth Third said it named Kabat chairman, replacing George Schaefer, who is retiring. Schaefer was also chief executive until April 2007.
The bank has $111 billion of assets and operates 1,314 branches in 12 U.S. states, mainly in the Midwest and Southeast.
Shares of Fifth Third fell $1.78, or 14 percent, to $10.95 in pre-market trading.
The bank, the second-largest based in Ohio, joins a growing number of rivals to raise capital and slash their dividends this year, including National City Corp (NYSE:NCC - News) and KeyCorp (NYSE:KEY - News), the state's largest and third-largest banks.
Ohio has been among the states hardest hit by the nation's housing slump. Fifth Third is based in Cincinnati, while National City and KeyCorp are based in Cleveland.
Fifth Third said it expects to issue $1 billion of convertible preferred shares and raise at least $1 billion more by selling non-core businesses in the next several quarters.
It also said it will cut its quarterly dividend to 15 cents per share from 44 cents.
"We expect these actions to enable us to weather further depreciation in home prices as well as a significant weakening in economic activity," Chief Executive Kevin Kabat said in a statement. "Our bottom-line results won't meet our expectations. We are not satisfied."
The bank was not immediately available for further comment.
Fifth Third said the moves will help it boost its Tier-1 capital ratio, a measure of its ability to cover losses, to 8.5 percent, above the 6 percent that regulators say reflects a "well-capitalized" bank.
It said it expects net charge-offs to equal 1.6 percent to 1.65 percent of loans and leases in 2008, and a higher percentage in 2009. It expects to set aside $350 million to $375 million more in the second quarter than actual net charge-offs, and that its provisioning will also exceed charge-offs in 2009.
Fifth Third said it named Kabat chairman, replacing George Schaefer, who is retiring. Schaefer was also chief executive until April 2007.
The bank has $111 billion of assets and operates 1,314 branches in 12 U.S. states, mainly in the Midwest and Southeast.
Friday, June 13, 2008
Dividend Dive
Regional banks used to be treasured for their generous dividend yields, but with loan losses mounting, those days are over.
On Thursday, KeyCorp (nyse: KEY - news - people ) said it would cut its dividend in half, weeks after it warned that net write-offs could be twice as high as initially forecast. The news sent its shares down 23.7%, or $3.73, to close at $11.98. During Thursday's session, the stock dipped to an all-time low of $11.64.
KeyCorp blamed its need for capital on an adverse ruling related to a tax dispute resulting from a partnership between KeyCorp and another regional bank, PNC Financial Services Group (nyse: PNC - news - people ). The ruling slapped KeyCorp with an after-tax accounting charge to earnings and capital in the range of $1.1 billion to $1.2 billion.
"If it had not been for the adverse court ruling on our tax treatment of a leveraged lease transaction, we probably would not have considered the capital raising actions. But the ruling forced our hand and prompted the decision to build on our strength with a capital raise, one that we think not only is prudent in light of the economic climate, but also is an appropriate move as we look to the future of the enterprise," said Chairman Henry Meyer.
On Wednesday, KeyCorp's board approved offerings for newly issued shares and convertible preferred stock as a way to raise $1.5 billion in much-needed equity. The board also said it plans to cut its annual dividend in half to 75 cents a share, resulting in $200.0 million, annually.
That lowers its yield to 6.3% from its previous payout of 9.5%, based on Wednesday's closing price of $15.71.
The consensus among analysts is that regardless of litigation charges, halving a dividend after a long history of annual increases, reflects poor management--especially after announcing that write-offs will be significantly higher than expected.
"The decision to reduce our dividend after 43 consecutive years of annual increases was made after great deliberation," Meyer said. "It was a record we were extremely proud of, but we must recognize the current economic realities as we manage our business for the future."
Regional banks, which boasted some of the best dividend yields in 2007, according to the Mergent Dividend Achievers 50 Index, have been scrambling to raise capital by slashing dividends and other measures in order to cover loan losses (See: " Banking's Mean Season"). And as a result, dividend yields have suffered. Index component Provident Bankshares (nasdaq: PBKS - news - people ) slashed its dividend in April. Provident Bank's parent company unveiled a capital-bolstering plan on April 11 that included the issuance of $65.0 million in securities and a $50.0 million subordinated debt offering for a total of $115.0 million in new capital. The plan also included a dividend reduction to 44 cents a share, annually for yearly savings of $29.0 million.
National City (nyse: NCC - news - people ) has cut its dividend twice this year--most recently, to a quarterly dividend of 1 cent a share from 21 cents a share, for a paltry yield of 0.8%.
By comparison, regional banks with steady dividends like Comerica (nyse: CMA - news - people ) and Fifth Third Bancorp (nasdaq: FITB - news - people )--both of which ranked on last year's Index at fourth and seventh, respectively--still have strong dividend yields at 8.3% and 12.0%. However, with shares of Comerica down 26.7% and Fifth Third's stock down 41.5% since the beginning of the year, it's clear that investors are still concerned about massive write-offs and those dreaded dividend cuts.
On Thursday, KeyCorp (nyse: KEY - news - people ) said it would cut its dividend in half, weeks after it warned that net write-offs could be twice as high as initially forecast. The news sent its shares down 23.7%, or $3.73, to close at $11.98. During Thursday's session, the stock dipped to an all-time low of $11.64.
KeyCorp blamed its need for capital on an adverse ruling related to a tax dispute resulting from a partnership between KeyCorp and another regional bank, PNC Financial Services Group (nyse: PNC - news - people ). The ruling slapped KeyCorp with an after-tax accounting charge to earnings and capital in the range of $1.1 billion to $1.2 billion.
"If it had not been for the adverse court ruling on our tax treatment of a leveraged lease transaction, we probably would not have considered the capital raising actions. But the ruling forced our hand and prompted the decision to build on our strength with a capital raise, one that we think not only is prudent in light of the economic climate, but also is an appropriate move as we look to the future of the enterprise," said Chairman Henry Meyer.
On Wednesday, KeyCorp's board approved offerings for newly issued shares and convertible preferred stock as a way to raise $1.5 billion in much-needed equity. The board also said it plans to cut its annual dividend in half to 75 cents a share, resulting in $200.0 million, annually.
That lowers its yield to 6.3% from its previous payout of 9.5%, based on Wednesday's closing price of $15.71.
The consensus among analysts is that regardless of litigation charges, halving a dividend after a long history of annual increases, reflects poor management--especially after announcing that write-offs will be significantly higher than expected.
"The decision to reduce our dividend after 43 consecutive years of annual increases was made after great deliberation," Meyer said. "It was a record we were extremely proud of, but we must recognize the current economic realities as we manage our business for the future."
Regional banks, which boasted some of the best dividend yields in 2007, according to the Mergent Dividend Achievers 50 Index, have been scrambling to raise capital by slashing dividends and other measures in order to cover loan losses (See: " Banking's Mean Season"). And as a result, dividend yields have suffered. Index component Provident Bankshares (nasdaq: PBKS - news - people ) slashed its dividend in April. Provident Bank's parent company unveiled a capital-bolstering plan on April 11 that included the issuance of $65.0 million in securities and a $50.0 million subordinated debt offering for a total of $115.0 million in new capital. The plan also included a dividend reduction to 44 cents a share, annually for yearly savings of $29.0 million.
National City (nyse: NCC - news - people ) has cut its dividend twice this year--most recently, to a quarterly dividend of 1 cent a share from 21 cents a share, for a paltry yield of 0.8%.
By comparison, regional banks with steady dividends like Comerica (nyse: CMA - news - people ) and Fifth Third Bancorp (nasdaq: FITB - news - people )--both of which ranked on last year's Index at fourth and seventh, respectively--still have strong dividend yields at 8.3% and 12.0%. However, with shares of Comerica down 26.7% and Fifth Third's stock down 41.5% since the beginning of the year, it's clear that investors are still concerned about massive write-offs and those dreaded dividend cuts.
Financials on the cheap
We will not have another Bear, Stears that is. .Lehman Brothers' shares surged 10.5 percent on Friday, snapping back after five days of declines, as investors looking for cheap stocks bought shares and some short-sellers closed out their positions, which is what any good advisor would suggest. There will be huge margin calls early next week as well.
The investment bank's shares fell by nearly a third between last Friday and Thursday's close, after it said on Monday that it expected to post a roughly $2.8 billion quarterly loss and about $3.7 billion of writedowns.
On Thursday, the company demoted its chief financial officer and chief operating officer amid a crisis of confidence in the bank's management.
At Thursday's close, Lehman's shares traded at less than 70 percent of their book value, or the company's net accounting value. That valuation often brings value investors into the market, analysts said."People do not expect Lehman to go the way of Bear Stearns," said Helena Ocampo, an analyst at Sentinel Investments in Montpelier, Vermont, which does not own Lehman shares.
Now is the time to buy Lehman, its $15 less than Morgan Stanley and Merril Lynch, and it does still show signs of life. However if you are looking for a good solid long term financial choice look at
PNC. It sforward P/E is above 10 and it has a diverse mix of incomes. I think the 52 week target is around 64.85. Plus PNC will not do what Key did and cut it dividend.
The investment bank's shares fell by nearly a third between last Friday and Thursday's close, after it said on Monday that it expected to post a roughly $2.8 billion quarterly loss and about $3.7 billion of writedowns.
On Thursday, the company demoted its chief financial officer and chief operating officer amid a crisis of confidence in the bank's management.
At Thursday's close, Lehman's shares traded at less than 70 percent of their book value, or the company's net accounting value. That valuation often brings value investors into the market, analysts said."People do not expect Lehman to go the way of Bear Stearns," said Helena Ocampo, an analyst at Sentinel Investments in Montpelier, Vermont, which does not own Lehman shares.
Now is the time to buy Lehman, its $15 less than Morgan Stanley and Merril Lynch, and it does still show signs of life. However if you are looking for a good solid long term financial choice look at
PNC. It sforward P/E is above 10 and it has a diverse mix of incomes. I think the 52 week target is around 64.85. Plus PNC will not do what Key did and cut it dividend.
Monday, June 9, 2008
iTold YouSo
Apple Inc. has unveiled an upgraded iPhone with a faster Internet connection and GPS capabilities.Analysts have said Apple needed to upgrade the iPhone's Internet connection to work over so-called 3G, or third-generation, wireless networks to hit its target of selling 10 million of the devices by the end of 2008. An 8 gigabyte model is to sell for $199 starting July 11.
The addition of global-positioning technology improves the iPhone's accuracy in locating users. Current versions use a combination of cell phone towers and Wi-Fi locations to do the same thing.
Chief Executive Steve Jobs showed off the phone at Apple's Worldwide Developers Conference in San Francisco.
Wednesday, June 4, 2008
Housing Market
LOS ANGELES - Ed McMahon, who for decades appeared as Johnny Carson's sidekick on "The Tonight Show," is fighting to avoid foreclosure on his multimillion-dollar Beverly Hills home, according to published reports.
The former "Star Search" host was $644,000 behind on payments on $4.8 million in mortgage loans when a unit of Countrywide Financial Corp. filed a default notice Feb. 28 with the Los Angeles County Recorder's Office, The Wall Street Journal first reported late Tuesday.
McMahon, 85, has been a pitchman for the American Family Publishers' sweepstakes.
However, he has been unable to work as a pitchman for various products since he broke his neck 18 months ago, said his spokesman, Howard Bragman.
"There are plenty of people affected by the weak economy, bad housing market or bad health," Bragman said.
McMahon has been in "very fruitful discussions" with the lender to resolve the situation, Bragman said. But it's unclear whether McMahon and his wife, Pamela, will remain in the home.
A telephone message left for Countrywide early Wednesday was not immediately returned.
The six-bedroom, five-bath house is in a hilltop gated community overlooking Mulholland Drive called The Summit and is listed for sale at $6.25 million. It has been on the market two years, according to real estate agent Alex Davis, who has the listing.
The house is near that of pop star Britney Spears, which doesn't always work in its favor. "When we were trying to sell the house one time, there were about 100 paparazzi there," Davis said.
The former "Star Search" host was $644,000 behind on payments on $4.8 million in mortgage loans when a unit of Countrywide Financial Corp. filed a default notice Feb. 28 with the Los Angeles County Recorder's Office, The Wall Street Journal first reported late Tuesday.
McMahon, 85, has been a pitchman for the American Family Publishers' sweepstakes.
However, he has been unable to work as a pitchman for various products since he broke his neck 18 months ago, said his spokesman, Howard Bragman.
"There are plenty of people affected by the weak economy, bad housing market or bad health," Bragman said.
McMahon has been in "very fruitful discussions" with the lender to resolve the situation, Bragman said. But it's unclear whether McMahon and his wife, Pamela, will remain in the home.
A telephone message left for Countrywide early Wednesday was not immediately returned.
The six-bedroom, five-bath house is in a hilltop gated community overlooking Mulholland Drive called The Summit and is listed for sale at $6.25 million. It has been on the market two years, according to real estate agent Alex Davis, who has the listing.
The house is near that of pop star Britney Spears, which doesn't always work in its favor. "When we were trying to sell the house one time, there were about 100 paparazzi there," Davis said.
Subscribe to:
Posts (Atom)
