mcgraw-hill/irwin ©2008 the mcgraw-hill companies, all rights reserved chapter19chapter19...
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![Page 1: McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER19CHAPTER19 CHAPTER19CHAPTER19 The Secondary Mortgage Market: Pass-Through](https://reader035.vdocuments.us/reader035/viewer/2022070413/5697bff71a28abf838cbeb64/html5/thumbnails/1.jpg)
McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved
CHAPTER
19
CHAPTER
19
The Secondary Mortgage Market:
Pass-Through Securities
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19-2
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Allows originators to replenish funds
• Facilitates geographic flow of funds
• Provides an investment option for savers
• Early buyers of mortgages Mortgage companies and thrifts
• FHA insurance and VA guarantees Minimum underwriting standards
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19-3
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• 1954 Charter Act: FNMA Enhance secondary market operations
• FHA and VA mortgages
Manage prior direct loans Manage special assistance programs FNMA transforms into a private organization FNMA issues securities
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19-4
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• HUD Act 1968: GNMA GNMA manages and liquidates FNMA loan
portfolio Special assistance functions Guarantee timely payment of principal and
interest for FHA-VA mortgage pools Eliminated any default delay in payments to
investors
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19-5
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Emergency Home Finance Act 1970: FHLMC Provide a secondary market for conventional
loans Allowed FNMA to purchase conventional
mortgages FHLMC allowed to purchase FHA and VA
mortgages Fannie Mae and Freddie Mac compete for all
mortgage loans
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19-6
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Operation Direct Sale Programs
• Mandatory Commitment
• Optional Delivery
• Mortgage-Related Security Pools Securitization
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19-7
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage-Backed Bonds Issuer retains ownership of mortgages Mortgages held in trust Fixed coupon rate Specific maturity Over collateralization Mark to market
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19-8
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage-Backed Bonds Investment Rating
• Mortgage Quality
• Geographic Diversification
• Interest Rates on Mortgages
• Prepayment Probability
• Over collateralization
• Appraised value and debt coverage ratio if commercial mortgages
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19-9
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage-Backed Bonds Example 19-1: Mortgage Bond Valuation 20-year to maturity Par value of $10,000 10.5% annual coupon. At issue, bond market investors require an
11% interest rate. What is the initial price of the bond?
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19-10
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage-Backed Bonds Example 19-1:
= $10,000
= 20
= .105 x $10,000 = $1,050
= 11
= $9,601.83
n
i
CPT
FV
PMT
PV
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19-11
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage-Backed Bonds In Example 19-1, what would be the price of
the bond 5 years later if investors required a 12% return?
N is 15 years I is 12%
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19-12
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage-Backed Bonds Example 19-1:
= $10,000
= 15
= $1,050
= 12
= $8,978.37
n
i
CPT
FV
PMT
PV
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19-13
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage-Backed Bonds Zero-Coupon Bond
• The only cash flow to an investor is a lump sum at maturity
• No interim coupon payments
• Also called “deep discount” bonds
• Analysis is just computing the present value of a lump sum
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19-14
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage Pass-Through Securities Ownership interest in a pool of mortgages Trustee is owner of the mortgages in the pool Principal & interest are passed through Servicing & guarantee fees
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19-15
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Mortgage Pass-Through Securities: Mortgage Pass-Through Securities: Issuance and Funds FlowIssuance and Funds Flow
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19-16
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage Pass-Through Securities Issuers & guarantors Default insurance Payment patterns and security Coupon rate and interest rates Seasoned mortgages
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19-17
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Mortgage Pass-Through Securities Number of mortgages Geographic distribution Borrower characteristics Loan prepayment Nuisance calls
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19-18
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Selected Characteristics of Pass-Selected Characteristics of Pass-Through SecuritiesThrough Securities
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19-19
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• General Pricing of MPTs Interest Rate Risk Default Risk Risk of Delayed Payment of Principal and
Interest Prepayment Risk
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19-20
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• General Pricing of MPTs Coupon Rate Yield to maturity Servicing Fee Weighted Average Coupon & Maturity Stated Maturity Date Payment Delays Pool Factors
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19-21
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Example 19-2: A mortgage pool consists of the following:
• $500,000 of 30-year 7% Fixed Rate Mortgages
• $200,000 of 29-year 6.5% Fixed Rate Mortgages
• $300,000 of 28-year 6% Fixed Rate Mortgages
What is the weighted average coupon and average maturity of the mortgage pool? If there is a servicing fee of .5%, what is the quoted maturity and quoted coupon rate?
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19-22
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Example 19-2:
• Quoted Maturity = 30 Years• Quoted Coupon Rate = 6% - .5% = 5.5%
Amount Maturity
Interest Rate
Weight W x M W x I
$500,000 30 7% .5 15 3.5
$200,000 29 6.5% .2 5.8 1.3
$300,000 28 6% .3 8.4 1.8
$1,000,000 WAM = 29.2
WAC = 6.6
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19-23
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19-24
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Secondary Mortgage MarketSecondary Mortgage Market
• Prepayment Assumptions Average Maturity Assumption Constant Prepayment Rate Assumption FHA Prepayment Experience PSA Prepayment Model
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19-25
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19-26
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Mortgage Pass-Through Securities Mortgage Pass-Through Securities With Differing ROR and PrepaymentWith Differing ROR and Prepayment