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FINA 320 > PowerPoint class 9: Mortgage backed securities > Flashcards

PowerPoint class 9: Mortgage backed securities Flashcards

1
Q

Primary Mortgage Market

A

Lenders that originate loans directly to borrowers

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2
Q

where does income come from in the Primary Mortgage Market?

A

finance charges

interest payments

loan serving fees (e.g., mortgage)

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3
Q

Secondary Mortgage Market

A

Provide a mechanism for replenishing funds used by mortgage operators such as mortgage banking companies

Why banks sell the loan?

Who wants to buy the loan?

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4
Q

Opportunities for Secondary Mortgage Market

A

Availability of default insurance (FMA) and loan guarantees (VA)

Development of standardized loan underwriting, processing, and servicing

Availability of hazard and title insurance

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5
Q

Fannie Mae

A

Provide liquidity to the home finance system when needed

would assume the interest rate risk associated with its role as an intermediary between mortgage originators (primary originators of FHA and VA loans) and investors in its bonds

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6
Q

primary originators of FHA and VA loans

A

mortgage originators

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7
Q

Ginnie Mae

A

Guarantee the timely payment of principal and interest on securities backed or secured by pools of mortgages insured by the FHA and the Farmers Home Administration (FmHA) or guaranteed by the VA

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8
Q

Freddie Mac

A

Provide a secondary market and, hence, liquidity for conventional mortgage originators just as Fannie Mae and Ginnie Mae did for originators of FHA-VA mortgages

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9
Q

Major Types of Mortgage-backed Securities (MBS)

A

Mortgage-backed bonds (MBB)

Mortgage pass-through securities (MPTS)

Mortgage pay-through bonds (MPTB)

Collateralized mortgage obligations (CMO)

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10
Q

Mortgage-backed Bonds (MBB)

A

The bond issuer establishes a pool of mortgages

The issuer retains ownership of the mortgages, but they are pledged as security and are usually placed in trust with a third-party trustee

Like corporate bonds, MBBs are usually issued with fixed-coupon rates and specific maturities

The issuer usually “overcollateralizes” the bond issue

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11
Q

overcollaterizing a mortgage-backed bond

A

Outstanding loan balances > Dollar amount of the securities issued

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12
Q

Investment rating

A

Quality of the mortgages

Geographic diversification

Interest rate

Prepaid likelihood

Overcollateralization

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13
Q

Mortgage-backed Bonds (MBB) - Pricing

A

Same as Coupon bonds, can be issued at premium, at discount, or at par.

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14
Q

Mortgage-backed Bonds (MBB) - Pricing

Sub-sequent price

A

Two years after issue, the interest rate stays constant at a particular interest rate

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15
Q

Interest Rate Risk

A

The sensitivity of a bond’s price to change in interest rates is a measure of the bond’s interest rate risk

affected by yield to maturity, term to maturity and size of coupon

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16
Q

bond duration

A

measures of interest rate risk as a change in price for a given change in interest rates

17
Q

what does a higher bond duration mean

A

the more sensitive its price is to changes in interest rates

18
Q

what will make a duration higher?

A

YTM is lower

Term to maturity is longer

Coupon is lower

19
Q

Determinants of mortgage value

A

Interest rates of each mortgages

Principal balance of each mortgages (prepayment)

Maturities of each mortgages

Default on loans

20
Q

Mortgage Pass-through Securities (MPTS)

A

Issued by a mortgage originator (e.g., mortgage company, thrift)

represent an undivided ownership interest in a pool of mortgages

21
Q

who issues Mortgage Pass-through Securities (MPTS)?

A

mortgage originator (e.g., mortgage company, thrift)

22
Q

Mortgage Pass-through Securities (MPTS) - Pricing

what influences the pricing?

A

Interest rate risk

Default risk

Risk of delayed payment of principal and interest

Prepayment risk

23
Q

Interest rate risk in Mortgage Pass-through Securities (MPTS)

when is it greatest?

A

This risk is generally greatest for pools containing fixed interest rate loans

24
Q

Default risk in Mortgage Pass-through Securities (MPTS)

A

generally higher for ARM or mortgages with Variable interest

25
Q

delayed payment of principal and interest risk in Mortgage Pass-through Securities (MPTS)

A

Ability of the guarantor to perform on the guarantee

26
Q

Prepayment risk in Mortgage Pass-through Securities (MPTS)

A

(e.g., # of (seasoned) mortgages, interest rates, geographic location, borrower characteristics, hazard)

27
Q

The coupon rate (C) on Mortgage Pass-through Securities (MPTS) compared to interest rate of mortgages in the pool

A

lower than the lowest rate of interest (I) on any mortgage in the pool

I > C

28
Q

Servicing fee (guarantor fee + loan services fee) in MPTSs

A

I – C

29
Q

Weighted Average Coupon (WAC) in MPTSs

A

Servicing fee (guarantor fee + loan services fee)= WAC – C

30
Q

The stated maturity date of the pass-through pool

A

longest maturity date for any mortgage in the pool, assuming no prepayments occur

31
Q

MPTS Payment delays by servicer

A

Time lags between the date homeowners make their mortgage payments and the date that the servicing agent pays the investors holding the pass-through securities

32
Q

MPTS Pool factor

A

outstanding Principal Balance / original pool balance

33
Q

what happens when the pool factor becomes smaller

A

the remaining balances on mortgages in the pool are also becoming smaller

–> the likelihood of prepayment becomes greater (holding all else constant)

34
Q

MBB vs MPTS

A

MBB issuers bear prepayment risk by virtue of the overcollateralization requirement

–> As prepayments accelerate and mortgages are prepaid, more mortgages must be replaced in the pool

Security holders of MPTS bear prepayment risk because all prepayments are passed through to investors

–> should be priced to provide lower yields than MPTs because the MBB issuer bears prepayment risk

–> As market interest rates change, the price of MBBs will not reflect accelerated prepayment rates

35
Q

why should MBBs be priced to provide lower yields than MPTs?

A

because the MBB issuer bears prepayment risk

36
Q

As market interest rates change, do the price of MBBs reflect accelerated prepayment rates?

A

nah

FINA 320 (10 decks)

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