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17 Cards in this Set
- Front
- Back
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Fannie mae
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1938
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freddie mac
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1970
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gennie mae
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1968
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Secondary mortgage mkt
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one in which existing mortgages are bought and sold. This is in contrast to the primary market, where mortgages are originated.
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MORTGAGE-BACKED SECURITIES (MBS)
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Mortgages (in the form of an asset) that are pledged as collateral for debt.
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COLLATERALIZED
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backed up
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PASS-THROUGH SECURITIES
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the first popular Mortgage Backed Security (MBS). The early successful ones were promoted by the Government National Mortgage Association (GNMA), a government agency within HUD, in the mid-to late 1960s. With a pass-through, the investor is said to have an undivided interest in the pool of mortgages. The investor has an "ownership" position in the mortgages. What this means is that he will receive the mortgage payments (principal and interest) and any prepayments just as if he were the lender.
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CREDIT ENHANCEMENT
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"MBSs will have some form of CREDIT ENHANCEMENT" This means that the MBS will have less default risk than the underlying mortgages that serve as collateral.
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DOUBLE TAXATION
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Where the MBS issuers revenue and the cash flows to the investor are taxed. If this happens any benefits of the arrangement will be offset.
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PRIVATE MORTGAGE INSURANCE (PMI)
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Insurance written by a private (non-governmental) company protecting the mortgage lender against loss caused by a mortgage default or foreclosure.
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POOL INSURANCE
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PMI on the entire pool, not the individual mortgages. Usually only a small percentage -- for example, 10%-- of the pool is insured.
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SENIOR/SUBORDINATED PASS-THROUGH
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A mortgage pass-through security issued in two classes. The subordinated class absorbs payment risk for both classes.
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MORTGAGE-BACKED BONDS (MBBs)
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MBBs are mortgage-backed securites that promise payments similar to corporate bonds. That is, they promise semiannual payments of interest only until maturity, with the face value due at maturity.
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MARK-TO-MARKET
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Mark-to-market refers to valuing the mortgages on a frequent basis as a result of the changes in the interest rates.
(basically its a method of valuing mortgages) |
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MORTGAGE PAY-THROUGH BONDS (MPTBs)
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MPTBs are mortgage-backed securities that are a cross between pass-through and MBBs. As with MBBs the issuer retains the ownership of the pool of mortgages and issues the MPTB as a debt obligation. The issuer also will overcollateralize the debt obligation. Just as with a pass-through, the cash flows to the investor are based on the coupon rate of interest, while principal from amortization and prepayments is passed through as received from the pool of mortgages. Thus, the investor in these bonds faces the same callability risk as those in pass-throughs. Pay-throughs are also rated by the agencies, based on the same factors associated with MBBs. Because the scheduled amortization of the mortgages and prepayments is passed through to reduce the principal of the bonds, the extent of overcollateralization is less that with MBBs.
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COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs)
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A multiple-class, pay-through bond, first issued by the FHLMC (freddie mac) in June 1983. They are secured by a pool of mortgages or a portfolio of pass-through securities. The CMO provides a type of call protection and pays principal and interest semiannually rather than monthly, as a pass-through security does.
CMOs go the farthest in rearranging the uncertain cash flows from a pool of mortgages into those desired by investors. The restructuring of the cash flows is the most complicated of all mortgage-backed securities. The object of CMOs is to rearrange the mortgage cash flows into several different bond-like securities with different maturities. The different bond classes are called tranches. A typical CMO will have three or four tranches. Because the cash flows from the mortgage pool are uncertain, there will be a tranche into which all residual cash flows accrue. this residual tranche often will be "owned" by the issuer of the CMO. Thus, the issuer will have to have an equity interest in the CMO. The cash flows that accrue to residual are a return-on-equity. |
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TRANCHE
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A class of securities in a multi-class securities offering.
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