MORTGAGE-BACKED SECURITIES : A STUDY FOR FEASIBILITY IN SINGAPORE

Abstract

Mortgage-backed securities are created through a process known as securitization. Securitization transforms the financial institution's balance sheet such that the assets are no longer held on the balance sheet until maturity but securities are sold in the market with the mortgages being the underlying collateral. Mortgage-Backed Securities are very attractive securities in a financial market. We intend looking into the feasibility of Mortgage-Backed Securities in Singapore. Mortgage-Backed securities are very complex to model due to the uncertainty attached to the cash-flows on the underlying mortgages. Among others, interest rates affect the price of the mortgage-backed security through the change in prepayments and through the change in discount rates for computing present values. Difficulty in modeling the prepayment behaviour of the mortgage owners presents another challenge. The valuation or pricing of mortgage-backed securities can be done using different methodologies. We have looked at two different approaches for pricing these securities in this dissertation.