Mortgages and MBS
8 important questions on Mortgages and MBS
What about mortgage loans?
Non-agency, non-conforming loans belong to private label. Alt-A or even Subprime. In which the later may involve prior deliquency. A lot of these mortgages are ARMs, adjustable-rate mortgages. These usually have low initial, teaser, rates which increase after a few years.
WHat about a prepayment option?
What about mortgage-backed securities?
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What about a mortgage pool?
- WAM, weighted-average maturity
- Factor is the ratio of the current to the original principal amount outstanding. Can be used to measure prepayments.
Coupon and age are most important for pricing!
How about prepayments in pools?
1 - (1-SMM)^12
WHat about specific pools and TBAs?
TBA = to be announced. TBA seller will pick the cheapest-to-deliver (CTD) pool, that is, the pool that is worth the least subject to the issuer, maturity, and coupon requirements. Pay-up, extra value above TBA. Usually able to have a below par price.
What about MBS valuation and trading?
Can use empirical hedge-ratios. Higher coupons prepay faster, thereby more like shorter-term securities meaning lower interest rate sensitivity.
OAS, option-adjusted spread. Relative value measure for MBS. Blend of relative and left-out factors. Rely on mean reversion. Usually a relative combined with a supporting story can be convincing.
WHat about price-behavior of MBS?
The question on the page originate from the summary of the following study material:
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