Yields of Mortgage- Backed Securities

Student: Ali ÜNAL

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What is Mortgage System ?

 A mortgage is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage  which secures  the loan .

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About Mortgage System Process

Mortgage loans are originated by Lenders such as savings and loan associations , commercial banks and mortgage banks .Lenders originating loans for their own portfolios are called portfolio Lenders and and some of Lenders originate loans but do not plan to keep the loans in their portfolios are called secondary Lenders . the secondary Lenders may sell the loans to secondary market agencies –Fannie Mae and Freddie Mac .

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Fannie Mae

Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise  (GSE), though it has been a publicly traded company since 1968. The corporation's purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on thrifts .

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Types of Mortgage- Backed Securities

A ) Mortgage Pass Through Securities :

In this case , securities backed by a pool or mortgages are sold to investors. The payments to the investors may be guaranteed by the Fannie Mae, Freddie Mac .

The mortgage servicers collect the monthly mortgage payments from the home owners , discount servicing and guarantee fees and give the rest of the payments to the investors . The investors are paid on a pro rata basis.

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Types of Mortgage- Backed Securities

B ) Mortgage Backed Derivative Securities :

In this case , more than one classes of securities backed by pools of mortgages or mortgage pass-throughs are created and principal and interest payments are allocated to different classes of securities . Within derivatives category , there are Collateralized Mortgage obligations ( CMOs),Real Estate Mortgage Investment Conduits(REMICs) and Stripped Mortgage- Backed Securities ( SMBs ).

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Types of Mortgage- Backed SecuritiesB ) Mortgage Backed Derivative Securities : CMOs are multiclass derivatives . For

example, if CMO has three classes of securities ( A, B , Z ) owners of securiteis A and B would receive interest on the paymnet dates but the interest on the class Z security would not be paid to the investors . Instead , the interest would be added to the face amount .

The other is the MBS . the stripped MBS may be a Principal Only or Interest Only .all the principal payments from the underlying security are allocated to the PO and all the interest payments allocated to the IO.

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Types of MBS yields

A ) Cash Flow Yield : Monthly cash flows consist of interest ,principal

payment,prepayments allocated to prepayments allocated to mortgage pass thgroug security unit . The face amount of a unit is normally $ 25 000 but the price of the unit depends on market conditions .

Monthly cash flow yield : % 1.11Annualized cash flow yield : %13.32 = 12 *

monthly cash flow yield ( 1.11 )

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Types Of MBS yields

B ) Bond Equivalent Yield

The cash flows from a mortgage pass-through are received monthly however the payments of a bond are received semiannually. The bond equivalent yield s comparable or equivalent to the yield of a bond.

Calculations

BEY = 2 * [ ( 1 + MCFY)^3- 1 ]BEY = Bond-Equivalent Yield MCFY = Monthly Cash Flow Yield 9

Types Of MBS yields B ) Bond Equivalent Yield

For instance ; The Previous section BEY is 13.7 percent

, can be calculated BEY = 2 * [ ( 1 + 0.0111 )^6 – 1 ] = 0.

137 ,  Abbreviation

BEY = 2 * [ ( 1 + MCFY)^3- 1 ]BEY = Bond-Equivalent Yield MCFY = Monthly Cash Flow Yield

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