1 / 14

Mortgage Pass-Through Securities

Mortgage Pass-Through Securities. Mortgage Pass-Through Securities. Cash flow passed through to the investors are less than the cash flow from the underlying mortgage due to: Servicing fees Guaranteeing fees Investors receive CF on a pro rata basis Weighted average coupon rate (WAC)

vidar
Download Presentation

Mortgage Pass-Through Securities

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Mortgage Pass-Through Securities

  2. Mortgage Pass-Through Securities • Cash flow passed through to the investors are less than the cash flow from the underlying mortgage due to: • Servicing fees • Guaranteeing fees • Investors receive CF on a pro rata basis • Weighted average coupon rate (WAC) • Weighted average maturity (WAM)

  3. MPTs • Agency pass-throughs • Fannie Mae • Freddie mac • Gannie Mae Also referred to as GSE pass throughs • Only conforming loans • Many market participants/investors will agency pass-throughs as implicitly carrying credit guarantee of U.S. government • Low credit risk

  4. MPTs • Non-Agency pass-throughs • Commercial banks • Thrifts • Private conduits • No implicit or explicit guarantees from the US government • Typically rated by rating agencies

  5. MPTs • Factors affecting rating • Property types • Condo; single family • Loan types • Fixed rate with level payment; adjustable rate; balloon • Loan terms • Geographical dispersion • Size • Seasoning • Purpose (refi vs. new purchase)

  6. MPTs • Usually rated by the rating agencies • Enough internal or external credit enhancement to obtain AA or AAA ratings • Internal enhancement • Reserve funds • Excess spread accounts • Overcollateralization • Senior/Subordinate structure • Shifting interest structure • Redirect prepayments to senior class • External enhancement • Insurance • 3rd party guarantor must have a rating higher than the pool rating

  7. Prepayment Conventions • Conditional prepayment rate (CPR) • Annual prepayment of the remaining outstanding principal value • On top of the scheduled principal payment • Single-Monthly Mortality Rate • Similar to CPR, but monthly • Relationship 1 - CPR = (1 - SMM)12 hence SMM = 1 – (1-CPR)1/12 • Prepayment • SMM * (OLB – Scheduled Principal PMT)

  8. PSA Benchmark CPRs • The Public Securities Association (PSA) prepayment benchmark assumes: • CPR grows 0.2% per month before the loan/pool reaches 30 month / 6% • Then CPR will stay flat at 6% for the remaining life of the loan/pool • CPR = 6% * min (t / 30, 1) • The benchmark is referred to as “100%” PSA, or “100 PSA” • Slower or faster speeds of prepayment is referred to as some percentage of PSA • 50 PSA; 150 PSA; 300 PSA • Just a convention of prepayment behavior

  9. An Excel Example • WAC = 8.125% • WAM = 357 Month • Coupon rate for MPT = 7.5% • Fees = .625% • Pool balance = $400,000,000

  10. Prepayment Modeling • Housing turnovers (home sales of existing houses) • Employment • Family status • Income and house price changes In general, not sensitive to mortgage rate • Cash-out refi • Depend on house price appreciation and home equity accumulation • Rate/term refi • Refinancing ratio = WAC / current mtg rate

  11. Prepayment Modeling • Other reasons • Curtailment / partial prepayment • Defaults • Historically less than 1% of prepayment

  12. Prepayment Modeling • Variables in the prepayment “regression” • Seasoning • Seasonality • HPI • LTV • WAC / Mortgage Rate • Pick up after ratio > 0.6 • Burnout effect

  13. The PSA Standard Default Assumption • SDA • 0.02% in month 1 • Increase by 0.02% b/w month 1 and 30 • Default stays at 0.60% b/w month 31 and 60 • From month 61 to 120, declines from 0.6^ to 0.03% • From month 120 on, remain constant at 0.03%

  14. Mortgage Prepayment Risk • Unlike treasuries, mortgage payment is uncertain • Contraction risk • Extension risk • Macauley duration • Weighted average term to maturity • Weight is the present value of the CF in total PV • Average life • Average time to receipt of principal payment • Weighted by the amount of principal expected

More Related