Mortgage Pass-Through Securities
Mortgage Pass-Through Securities
• Cash flow passed through to the investors are
less than the cash flow from the underlying
mortgage due to:
– Servicing fees
– Guaranteeing fees
• Investors receive CF on a pro rata basis
• Weighted average coupon rate (WAC)
• Weighted average maturity (WAM)
MPTs
• Agency pass-throughs
– Fannie Mae
– Freddie mac
– Gannie Mae
Also referred to as GSE pass throughs
• Only conforming loans
• Many market participants/investors will agency
pass-throughs as implicitly carrying credit
guarantee of U.S. government
– Low credit risk
MPTs
• Non-Agency pass-throughs
– Commercial banks
– Thrifts
– Private conduits
• No implicit or explicit guarantees from the
US government
• Typically rated by rating agencies
MPTs
• Factors affecting rating
– Property types
• Condo; single family
– Loan types
• Fixed rate with level payment; adjustable rate;
balloon
– Loan terms
– Geographical dispersion
– Size
– Seasoning
– Purpose (refi vs. new purchase)
MPTs
• Usually rated by the rating agencies
– Enough internal or external credit enhancement to obtain AA or
AAA ratings
• Internal enhancement
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Reserve funds
Excess spread accounts
Overcollateralization
Senior/Subordinate structure
Shifting interest structure
• Redirect prepayments to senior class
• External enhancement
– Insurance
– 3rd party guarantor must have a rating higher than the pool rating
Prepayment Conventions
• Conditional prepayment rate (CPR)
– Annual prepayment of the remaining outstanding
principal value
– On top of the scheduled principal payment
• Single-Monthly Mortality Rate
– Similar to CPR, but monthly
• Relationship
1 - CPR = (1 - SMM)12
hence
SMM = 1 – (1-CPR)1/12
• Prepayment
– SMM * (OLB – Scheduled Principal PMT)
PSA Benchmark CPRs
• The Public Securities Association (PSA)
prepayment benchmark assumes:
– CPR grows 0.2% per month before the loan/pool
reaches 30 month / 6%
– Then CPR will stay flat at 6% for the remaining life of
the loan/pool
– CPR = 6% * min (t / 30, 1)
• The benchmark is referred to as “100%” PSA, or
“100 PSA”
– Slower or faster speeds of prepayment is referred to
as some percentage of PSA
– 50 PSA; 150 PSA; 300 PSA
– Just a convention of prepayment behavior
An Excel Example
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WAC = 8.125%
WAM = 357 Month
Coupon rate for MPT = 7.5%
Fees = .625%
Pool balance = $400,000,000
Prepayment Modeling
• Housing turnovers (home sales of existing
houses)
– Employment
– Family status
– Income and house price changes
In general, not sensitive to mortgage rate
• Cash-out refi
– Depend on house price appreciation and home equity
accumulation
• Rate/term refi
– Refinancing ratio = WAC / current mtg rate
Prepayment Modeling
• Other reasons
– Curtailment / partial prepayment
– Defaults
– Historically less than 1% of prepayment
Prepayment Modeling
• Variables in the prepayment “regression”
– Seasoning
– Seasonality
– HPI
– LTV
– WAC / Mortgage Rate
• Pick up after ratio > 0.6
• Burnout effect
The PSA Standard Default Assumption
• SDA
– 0.02% in month 1
– Increase by 0.02% b/w month 1 and 30
– Default stays at 0.60% b/w month 31 and 60
– From month 61 to 120, declines from 0.6^ to
0.03%
– From month 120 on, remain constant at
0.03%
Mortgage Prepayment Risk
• Unlike treasuries, mortgage payment is
uncertain
– Contraction risk
– Extension risk
• Macauley duration
– Weighted average term to maturity
• Weight is the present value of the CF in total PV
• Average life
– Average time to receipt of principal payment
• Weighted by the amount of principal expected