Residential Mortgage-Backed Securities Modeling: A Fundamental Approach

This article surveys the recent developments in the credit markets paying special attention to the issues surrounding the valuation of residential mortgage-backed securities (RMBS) and related collateralized debt obligations (CDOs). It also offers a modeling framework whose purpose is to provide a robust and transparent approach to the valuation of securities backed by real estate assets. The proposed framework utilizes a stochastic Monte Carlo approach based on econometric analysis of underlying data at the individual loan level paired with accurate reflection of the transactions ’ financial structure, while accounting for liquidity risk