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Mortgage-Backed Securities

Mortgage-Backed Securities. Carolina Olsson Rebecca Nygårds-Kers. MBS. Object for today. Securitization Mortgage securities MBS Different types of MBS Risks. Securitization.

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Mortgage-Backed Securities

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  1. Mortgage-Backed Securities Carolina Olsson Rebecca Nygårds-Kers MBS

  2. Object for today • Securitization • Mortgage securities • MBS • Different types of MBS • Risks

  3. Securitization • Securitization is the process of aggregating similar instruments, such as loans or mortgages, into a negotiable security. Privat Company/ Agency Investors Financial institution Creditors Action to improve the creditability

  4. What is mortgage loan? • A contract between two parties, a borrower and a lender What ismortgage security? • A security made out of mortgage loans

  5. MBS Mortgage backed security (MBS) is a security that is based on a pool of underlying mortgages Originators Pool Investors • Bank • Agency • Private Corp. • corporations • Life insurance companies • Pension funds "mortgage pass-through"

  6. MBS • Players in the secondary market : GNMA – Government National Mortgage Association FNMA – Federal National Mortgage Association FHLMC – Federal Home Loan Mortgage Corporation

  7. Different types of MBS • Collateralized mortgage obligations • Stripped Mortgage-Backed securities

  8. Bonds that represent claims to specific cash flows from large pools of home mortgages Sequential pay Tranches Planned Amortization Class (PAC) Tranches. Targeted Amortization Class (TAC) Tranches Z-Tranches Principal-Only (PO) Securities Interest-Only (IO) Securities Floating-Rate Tranches CMO Diffrent types of CMOs

  9. Stripped MBS • The cash flows from the underlying mortgage loans are divided to create two or more new securities. • Principal-only (PO) and interest-only (IO).

  10. Risks • Prepayment Risk • Average life • Market Risk

  11. Prepayment risk • Prepayment can occur when the houseowner is selleing their house or refinancing the mortgage. • The investor in a MBS is assumed a risk that the MBS will pay principal faster or slower than expected.

  12. Average life • When talking about the maturity date of Mortgage securities, we are talking about the average life of the security. • The average life is the average time that each principal dollar in the pool is expected to be outstanding, based on certain assumptions about prepayment speeds.

  13. Market risk • The market risk is the risk that the price of the security may fluctuate over time

  14. THE END

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