participation in the pools--to investors.•Pools are characterized by their weighted average coupon rate and maturity (WAC and WAM)Each month, the total of all principal and interest payments made by the mortgages in the pool, less a servicing spread, goes to the security holders.
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Debt Instruments and MarketsProfessor CarpenterThe Mortgage Market4Before 1970, mortgage loans were held by originators, such as banks and thrifts.During the 1970s, a market emerged in which originators sold theloans to agencies which pooled them and created marketable mortgage-backed securities. The first pass-through was issued in 1970. A pass-through pays pro-rated share of the pool cash flows.Since the 1980s, the cash flows from mortgage pools have been packaged in more exotic ways: CMOs, IOs, POs, PAC Bonds(Planned Amortization Class, largely eliminates prepayment risk), Support classesThe first European mortgage-backed securities were issued in the U.K. in 1987. These tend to be variable rate securities with lower and more stable prepayment rates than in the U.S.Issuance of mortgage backed securities has spread since the 1990s to Australia, Japan, southeast Asia, Latin America and Canada.Securitization: BackgroundSecuritization: Issuing AgenciesMortgage bankers buy mortgages from home buyers and sell them tomortgage-backed security issuers.The main issuers are federal agencies:–GNMA (Government National Mortgage Association, Ginnie Mae)–FHLMC (Federal Home Loan Mortgage Corporation, Freddie Mac)–FNMA (Federal National Mortgage Association, Fannie Mae)–No “default risk”—mortgages are insured so defaults show up as prepayment in the poolThere is also a growing market for private labels(non-agency issuers)–Loans need not conform to agency requirements–Some loans may be uninsured.