Mortgage Pass through Securities
· Simply channel the cash flows from underlying mortgages to the holders of securities. The shares are in form of participation certificates and the prepayment risk is similar to callable risk. Underlying mortgags that met underwriting criteria are conforming loans and the mortgages in the pool are securitized.
Collateralized Mortgage Obligations (CMOs)
· Subdivide the mortgage pool into several tranches with different cash flows and prepayment risk profiles {junior tranches bear more}. The tranches offer investors different payment rules and par values. For example Tranche A might receive all principal payments until the balance is zero then the payments would flow to Tranche B and so on.
Stripped Mortgage-Backed Securities
Note:
· Home mortgages- Consist of equal monthly payments {interest plus principal} and allow borrowers to prepay all or a part of the loan.
· Prepayment & curtailment - Mortgage backed security receive principle & interrest payments after administrative costs deducted, ie net interest for MBS investors. Prepayment rfer to early retirement of whole balance, Curtailment- refer to partial prepayment
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