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Chapter 24

Chapter 24. MORTGAGE-BACKED SECURITIES MARKET. Mortgage-Backed Securities. Mortgage Pass-Through Securities Derivative Mortgage-Backed Securities Collateralized Mortgage Obligations Stripped Mortgage-Backed Securities. Asset Securitization. Originate mortgage

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Chapter 24

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  1. Chapter 24 MORTGAGE-BACKED SECURITIES MARKET

  2. Mortgage-Backed Securities • Mortgage Pass-Through Securities • Derivative Mortgage-Backed Securities • Collateralized Mortgage Obligations • Stripped Mortgage-Backed Securities

  3. Asset Securitization • Originate mortgage • Sell mortgage to investment banking firm • Insure pool of mortgages • Sell right to service loans • Sell securities collateralized by mortgages to investors

  4. Foundations of the Mortgage Market • Federal Home Loan Banks (FHLBs) • Federal Housing Administration (FHA) • Federal National Mortgage Association (FNMA) • Fannie Mae • Ginnie Mae

  5. Mortgage Pass-Through Securities • Created when one or more holders of mortgages form a pool of mortgages and sell shares in the pool. • Features • more liquid • securitized

  6. Cash Flow Characteristics • Monthly mortgage payments • interest • principal repayment • Timing of monthly mortgage payments and payments made to investors is not identical • Magnitude of monthly mortgage payments is greater than payments for pass-through securities • servicing fee • other fees

  7. Issuers of Mortgage Pass-Through Securities • Government National Mortgage Association • Federal Home Loan Mortgage Corporation • Federal National Mortgage Association

  8. Nonagency Pass-Through Securities • Conforming mortgages • Nonconforming mortgages • Jumbo loans • Nonagency pass-throughs

  9. Issuers of Nonagency Pass-Throughs • Commercial Banks • Investment Banking Firms • Others

  10. Credit Enhancements • Corporate Guarantees • Pool insurance from a mortgage insurance company • Bank letter of credit • Senior/subordinated interests

  11. Prepayment Risk and Prepayment Conventions • Prepayment risk is the risk associated with prepayments • Contraction risk • Extension risk • Prepayment Conventions • Prepayment speed • Conditional prepayment rates • Single-monthly mortality rate

  12. Average Life • It is the average time to receipts of principal payments weighted by the amount of principal expected. • The average life of a pass-through depends on the PSA prepayment assumption.

  13. Collateralized Mortgage Obligations • Tranches • Collateralized Mortgage Obligations • Types of Tranches • Sequential-Pay CMOs • Accrual Bonds • Planned Amortization Class Tranches • Floating-Rate Tranche • Inverse Floating-Rate Tranche

  14. Stripped Mortgage-Backed Securities • Created by distributing principal and interest from pool of underlying mortgages on a pro rata basis to security holders. • Features • Derivative mortgage security • Hedges prepayment risk • Types: • Partially stripped securities • Interest-only/principal-only securities

  15. Yields on Mortgage-Backed Securities • Yields are a function of prepayment risk • Yield calculation requires • determination of cash flow • projections of prepayment • The PSA convention is used

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