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Chapter 10 - Chapter 10 Mortgage-Backed Securities A...

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1 Chapter 10 – Mortgage-Backed Securities 1. A mortgage is a loan that is collateralized with a specific piece of real property, residential or commercial. 2. Cash flow characteristic of a fixed rate, level payment, fully amortized loan 3. Concept of prepayments and how they result in prepayment risk 4. Investment characteristics of a mortgage pass-through security – concept of pooling several mortgages to create a “pool” and selling it to investors. Securitization is done by GNMA, FNMA and FHLMC 5. Importance of prepayments in estimating cash flow of a mortgage security 6. Compare and contrast the CPR (Constant prepayment rate) to the PSA (Public Securities Association). CPR – is the annual rate ex. 12 CPR or 12% per annum of the outstanding is paid off or 1% monthly. A monthly rate is computed by the formula: SMM = 1 – (1-CPR) ^ (1/12) 7. Mathematically, 100 PSA can be expressed as follows: 1. If t, is the number of months since the mortgage was originated, 2. It t< 30 then CPR = 6% (t/30) and if t>= 30 then CPR=6% 8. For month 5: CPR = 6% (5/30) = 1% = 0.01
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