Mortgage-Backed Securities

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Mortgage-Backed Securities
MBS

• Carolina Olsson
• Rebecca Nygårds-Kers

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Object for today

• Securitization
• Mortgage securities
• MBS
• Different types of MBS
• Risks

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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
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What is mortgage loan?

• A contract between two parties, a borrower and a
  lender

What is mortgage security?

• A security made out of mortgage loans

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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"
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MBS

• Players in the secondary market
• GNMA Government National Mortgage
  Association
• FNMA Federal National Mortgage
  Association
• FHLMC Federal Home Loan Mortgage
  Corporation

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Different types of MBS

• Collateralized mortgage obligations
• Stripped Mortgage-Backed securities

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CMO

• 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

Diffrent types of CMOs
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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).

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Risks

• Prepayment Risk
• Average life
• Market Risk

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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.

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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.

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Market risk

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

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THE END