Method of and apparatus for administering an asset-backed security using coupled lattice efficiency analysis

• US 20030105696A1
• Filed: 12/04/2002
• Published: 06/05/2003
• Est. Priority Date: 12/04/2001
• Status: Active Grant

• Current Assignee: ICE Data Services, Inc. (Intercontinental Exchange, Inc.)
• Original Assignee: Andrew Kalotay Associates, Inc.
• Inventors: Yang, Deane, Kalotay, Andrew J.
• Granted Patent: US 7,574,396 B2
• Time in Patent Office: Days
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

New tools for modeling prepayment of principal by obligors behind asset-backed securities are provided. The obligors are categorized into groups for ordered removal from the modeling and valuation process according to their refinancing efficiency, for instance. These tools can be used in a coupled-lattice recursive analysis process to obtain the value of asset-backed securities such as mortgage-backed securities and collateralized mortgage obligations.

Claims

1. A method of administering an asset-backed security, comprising the steps of:

a. gathering specifications of aspects of a plurality of assets, said assets generating cashflows from payment by obligors of principal and interest, wherein a level of cashflows from said assets is susceptible to change due to prepayments by said obligors;

b. forming an asset pool from said plurality of assets according to at least one common aspect of said pooled assets;

c. deriving an asset-backed security from said asset pool;

d. distributing cashflows based on at least one of principal payments and interest payments from said obligors whose assets are members of said asset pool;

e. modeling asset pool prepayment behavior including the sub-steps of;

i. defining refinancing efficiency categories of obligors into at least three buckets according to an expected efficiency of obligors in deciding when to refinance,

ii. partitioning the assets in the asset pool into asset pool efficiency buckets according to said refinancing efficiency buckets,

iii. removing scheduled payments and core prepayments of principal which are not related to changing interest rates pro-rata from all asset pool efficiency buckets,

iv. attributing excess of actual over scheduled prepayments to obligors refinancing assets in said asset pool, and

v. removing assets from said asset pool in a preset order according to the defined ordered refinancing buckets of obligors to reflect refinancing of assets by obligors and thus obtain a model of remaining pool; and

f. determining the current value of the asset-backed security, said current value determining step including the sub-steps of;

i. determining a core payment rate cash flow for said asset pool,

ii. generating a coupled asset-backed security/asset lattice from input interest rate environment,

iii. determining “

nodes”

on lattice when each defined refinancing category of said asset pool would refinance using said coupled asset-backed security/asset lattice,

iv. determining future cash flow from principal payments paid by asset pool using said model of remaining pool,

v. determining asset-backed security cashflow including both principal and interest payments, and

vi. determining a value for said asset-backed security by discounting and adding cash flows.

2. The method according to claim 1, wherein said asset-backed securities are mortgage-backed securities and said obligors are mortgagors.

3. The method according to claim 1, wherein said asset-backed securities are collateralized mortgage obligation and said obligors are mortgagors.

4. The method according to claim 1, wherein said refinancing buckets of obligors include leapers who refinance before an optimal time, financial engineers who refinance at the optimal time, and laggards who refinance after the optimal time.

5. The method according to claim 1, wherein said refinancing efficiency of obligors in deciding when to refinance is determined by savings/option value, wherein said option value is calculated assuming that interest rates for similar assets will follow a random walk.

6. The method according to claim 1, wherein said step of generating a coupled asset-backed security/asset lattice from input interest rate environment includes the steps of:

i. modeling interest rates assuming correlated asset and asset-backed security yield curves which follow a random walk, and

ii. using said correlated asset and asset-backed security yield curves to construct said coupled asset-backed security/asset lattice.

7. The method according to claim 1, further comprising the steps of (g) using said value for said asset-backed security in one or more activities selected from a group consisting of a portfolio of whole loans, managing a portfolio of mortgage service rights, and formulating portfolio strategies.

11. A computer readable media on which is stored a program capable of, when executed on a computer system, of carrying out the method of claim 1.

8. A method of modeling asset pool prepayment behavior, comprising the steps of:

defining refinancing efficiency categories of obligors into at least three buckets according to an expected efficiency of obligors in deciding when to refinance,

partitioning the assets in the asset pool into asset pool efficiency buckets according to said refinancing efficiency buckets,

removing scheduled payments and core prepayments of principal which are not related to changing interest rates pro-rata from all asset pool efficiency buckets,

attributing excess of actual over scheduled prepayments to obligors refinancing assets in said asset pool, and

removing assets from said asset pool in a preset order according to the defined ordered refinancing buckets of obligors to reflect refinancing of assets by obligors and thus obtain a model of remaining pool.

9. A method of determining a current value of an asset-backed security, comprising the steps of:

determining a core payment rate cash flow for said asset pool, generating a coupled asset-backed security/asset lattice from input interest rate environment,

determining nodes on lattice when each defined refinancing category of said asset pool would refinance using said coupled asset-backed security/asset lattice,

determining future cash flow from principal payments paid by asset pool using said model of remaining pool,

determining asset-backed security cashflow including both principal and interest payments, and

determining a value for said asset-backed security by discounting and adding cash flows.

10. A value for an asset-backed security determined by the steps of:

i. determining a core payment rate cash flow for said asset pool,

ii. generating a coupled asset-backed security/asset lattice from input interest rate environment,

iii. determining “

nodes”

on lattice when each defined refinancing category of said asset pool would refinance using said coupled asset-backed security/asset lattice,

iv. determining future cash flow from principal payments paid by asset pool using said model of remaining pool,

v. determining asset-backed security cashflow including both principal and interest payments, and

vi. determining a value for said asset-backed security by discounting and adding cash flows.

12. An apparatus for administering an asset-backed security comprising a method of administering an asset-backed security, comprising the steps of:

a. a means for gathering specifications of aspects of a plurality of assets, said assets generating cashflows from payment by obligors of principal and interest, wherein a level of cashflows from said assets is susceptible to change due to prepayments by said obligors;

b. a means for forming an asset pool from said plurality of assets according to at least one common aspect of said pooled assets;

c. a means for deriving an asset-backed security from said asset pool;

d. a means for distributing cashflows based on at least one of principal payments and interest payments from said obligors whose assets are members of said asset pool;

e. a means for modeling asset pool prepayment behavior including the sub-steps of;

i. defining refinancing efficiency categories of obligors into three buckets according to an expected efficiency of obligors in deciding when to refinance,

ii. partitioning the assets in the asset pool into asset pool efficiency buckets according to said refinancing efficiency buckets,

iii. removing scheduled payments and core prepayments of principal which are not related to changing interest rates pro-rata from all asset pool efficiency buckets,

iv. attributing excess of actual over scheduled prepayments to obligors refinancing assets in said asset pool, and

v. removing assets from said asset pool in a preset order according to the defined ordered refinancing buckets of obligors to reflect refinancing of assets by obligors and thus obtain a model of remaining pool; and

f. a means for determining the current value of the asset-backed security, said current value determining step including the sub-steps of;

i. determining a core payment rate cash flow for said asset pool,

ii. generating a coupled asset-backed security/asset lattice from input interest rate environment,

iii. determining “

nodes”

on lattice when each defined refinancing category of said asset pool would refinance using said coupled asset-backed security/asset lattice,

iv. determining future cash flow from principal payments paid by asset pool using said model of remaining pool,

v. determining asset-backed security cashflow including both principal and interest payments, and

vi. determining a value for said asset-backed security by discounting and adding cash flows.