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Chapter 13Mortgage-Backed Securities

• A Brief History of Mortgage-Backed Securities
• Fixed-Rate Mortgages
• Government National Mortgage Association
• Public Securities Association Mortgage Prepayment
  Model
• Cash-Flow Analysis of GNMA Fully Modified
  Mortgage Pools
• Collateralized Mortgage Obligations
• Yields for Mortgage-Backed Securities
  Collateralized Mortgage Obligations
• Summary Conclusions

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A Brief History Fixed Rate Mortgages

• Mortgage pass-throughs
• Mortgage-backed securities (MBSs)
• Mortgage securitization
• Fixed-rate mortgages
• Mortgage principal
• Mortgage amortization
• Mortgage prepayment

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Constant Monthly Payment Example
For a 90,000, 30 year, 11 mortgage, the payment
is
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Government National Mortgage Association

• GNMA
• Mortgage pools FHA, VA, FMHA
• Fully modified
• Prepayment risk
• GNMA bond
• GNMA clones
• Federal Home Loan Mortgage Corporation (FHLMC)
• Federal National Mortgage Association (FNMA)

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PSA Mortgage Prepayment Model

• Prepayment rate
• Public Securities Association (PSA)
• Seasoned versus unseasoned mortgages
• Conditional prepayment rates (CPRs)
• Single monthly mortality (SMM)
• SMM 1 - (1 - CPR)1/12
• Average life
• Deviations from 100 PSA benchmark are stated as
  percent of benchmark (50 PSA)

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PSA Mortgage Prepayment Model

• Prepayments benchmark
• Annual prepayment rate of .2 in month 1
• Annual prepayment rate of .4 in month 2
• Annual prepayment rate of .6 in month 3
• Continues to rise by .2 per month until reaching
  6 in month 30
• Prepayment Schedule Avg Mortgage Life (yrs)
• 50 PSA 20.40
• 100 PSA 14.68
• 200 PSA 8.87
• 400 PSA 4.88

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Cash Flow Analysis of GNMA Pools

• Each monthly cash flow has
• 1. Interest payment on outstanding principal
• 2. Scheduled amortization of principal
• 3. Mortgage principal prepayments
• GNMA investors face substantial cash flow
  uncertainty
• Prepayment risk / interest rate risk
• Macaulay Duration???

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Collateralized Mortgage Obligations

• CMOs
• Best known types
• Interest-only (IO)
• Principal-only (PO) (strips)
• Sequential CMOs
• Protected amortization class securities (PACs)
• Sequential CMOs
• Tranche
• Cash flow yield

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Protected Amortization Class Bonds

• PAC
• PAC support bonds (companion bonds)
• PAC collar
• Contingency rules

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Problem 13-3

• What is the monthly payment on a 30-year fixed
  rate mortgage if the original balance is 180,000
  and the rate is 8?
• Solution

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Problem 13-6

• If a mortgage has monthly payments of 1,000, a
  life of 30 years, and a rate of 6 per year, what
  is the mortgage amount?
• Solution

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Problem 13-16

• What is the single-month mortality for seasoned
  50 PSA, 200 PSA, and 400 PSA mortgages? How do
  you interpret these numbers?
• Solution
• SMM 1 - (1 - CPR)1/12
• 50 PSA .254
• 200 PSA 1.06
• 400 PSA 2.26
• Notice 400 PSA is not double the 200 PSA, there
  is a compound interest-type effect.