MortgageBacked Securities MBS Carolina Olsson Rebecca NygrdsKers 10262020
Mortgage-Backed Securities MBS Carolina Olsson Rebecca Nygårds-Kers 10/26/2020 1
Object for today n n n 10/26/2020 Securitization Mortgage securities MBS Different types of MBS Risks 2
Securitization n Securitization is the process of aggregating similar instruments, such as loans or mortgages, into a negotiable security. Creditors Financial institution Privat Company/ Agency Investors Action to improve the creditability 10/26/2020 3
What is mortgage loan? n A contract between two parties, a borrower and a lender What is mortgage security? n A security made out of mortgage loans 10/26/2020 4
MBS Mortgage backed security (MBS) is a security that is based on a pool of underlying mortgages Originators § Bank 10/26/2020 Pool Investors §Agency § corporations § Private Corp. § Life insurance companies "mortgage pass-through" §Pension funds 5
MBS n Players in the secondary market : GNMA – Government National Mortgage Association FNMA – Federal National Mortgage Association FHLMC – Federal Home Loan Mortgage Corporation 10/26/2020 6
Different types of MBS 10/26/2020 n Collateralized mortgage obligations n Stripped Mortgage-Backed securities 7
CMO § Bonds that represent claims to specific cash flows from large pools of home mortgages § Sequential pay § § § 10/26/2020 Tranches Planned Amortization Class (PAC) Tranches. Targeted Amortization Class (TAC) Tranches Z-Tranches Principal-Only (PO) Securities Interest-Only (IO) Securities Floating-Rate Tranches Diffrent types of CMOs 8
Stripped MBS n n 10/26/2020 The cash flows from the underlying mortgage loans are divided to create two or more new securities. Principal-only (PO) and interest-only (IO). 9
Risks 10/26/2020 n Prepayment Risk n Average life n Market Risk 10
Prepayment risk n n 10/26/2020 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. 11
Average life n n 10/26/2020 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. 12
Market risk n 10/26/2020 The market risk is the risk that the price of the security may fluctuate over time 13
THE END 10/26/2020 14
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