Mortgage Backed Sector

Summaries

A mortgage is a loan that is collateralized with residential or commercial real properties.

Mortgage insurance cost is bore by the borrower, and effectively raises the interest of the mortgage.

Prepayment – pay more than required

Curtailment – prepayment less than entire principal outstanding

Net interest = mortgage rate – servicing fee (e.g. 40 basis points)

Therefore, servicing fee decreases with payment.

Mortgage passthrough securities characteristics

1. Weighted average maturity (WAM)
2. Weigthed average coupon (WAC)
3. Passthrough rate = WAC – service fee

3 types of agency passthrough securities:

Ginnie Mae – Government National Mortgage Association   (No credit risk)

Freddie Mac – Federal Home Loan Mortgage Corporation

Fannie Mae – Federal National Mortgage Association