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Yields of mortgage   backed securities
 

Yields of mortgage backed securities

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    Yields of mortgage   backed securities Yields of mortgage backed securities Presentation Transcript

    • Yields of Mortgage- Backed Securities Student: Ali ÜNAL 1
    • What is Mortgage System ?A mortgage is a loan secured by realproperty through the use of a mortgage note whichevidences the existence of the loan and theencumbrance of that realty through the granting ofa mortgage which secures the loan . 2
    • About Mortgage System Process Mortgage loans are originated by Lenders such assavings and loan associations , commercial banks andmortgage banks .Lenders originating loans for theirown portfolios are called portfolio Lenders and andsome of Lenders originate loans but do not plan to keepthe loans in their portfolios are called secondaryLenders . the secondary Lenders may sell the loans tosecondary market agencies –Fannie Mae and FreddieMac . 3
    • Fannie Mae Fannie Mae, was founded in 1938 during the GreatDepression as part of the New Deal. It is a government-sponsored enterprise (GSE), though it has been apublicly traded company since 1968. The corporationspurpose is to expand the secondary mortgagemarket by securitizing mortgages in the formof mortgage-backed securities (MBS), allowing lendersto reinvest their assets into more lending and in effectincreasing the number of lenders in the mortgagemarket by reducing the reliance on thrifts . 4
    • Types of Mortgage- Backed SecuritiesA ) Mortgage Pass Through Securities : In this case , securities backed by a pool or mortgages are sold to investors. The payments to the investors may be guaranteed by the Fannie Mae, Freddie Mac . The mortgage servicers collect the monthly mortgage payments from the home owners , discount servicing and guarantee fees and give the rest of the payments to the investors . The investors are paid on a pro rata basis. 5
    • Types of Mortgage- Backed SecuritiesB ) Mortgage Backed Derivative Securities : In this case , more than one classes of securities backed by pools of mortgages or mortgage pass- throughs are created and principal and interest payments are allocated to different classes of securities . Within derivatives category , there are Collateralized Mortgage obligations ( CMOs),Real Estate Mortgage Investment Conduits(REMICs) and Stripped Mortgage- Backed Securities ( SMBs ). 6
    • Types of Mortgage- Backed SecuritiesB ) Mortgage Backed Derivative Securities : CMOs are multiclass derivatives . For example, if CMO has three classes of securities ( A, B , Z ) owners of securiteis A and B would receive interest on the paymnet dates but the interest on the class Z security would not be paid to the investors . Instead , the interest would be added to the face amount . The other is the MBS . the stripped MBS may be a Principal Only or Interest Only .all the principal payments from the underlying security are allocated to the PO and all the interest payments allocated to the IO. 7
    • Types of MBS yieldsA ) Cash Flow Yield : Monthly cash flows consist of interest ,principal payment,prepayments allocated to prepayments allocated to mortgage pass thgroug security unit . The face amount of a unit is normally $ 25 000 but the price of the unit depends on market conditions .Monthly cash flow yield : % 1.11Annualized cash flow yield : %13.32 = 12 * monthly cash flow yield ( 1.11 ) 8
    • Types Of MBS yields B ) Bond Equivalent Yield The cash flows from a mortgage pass-through are received monthly however the payments of a bond are received semiannually. The bond equivalent yield s comparable or equivalent to the yield of a bond. CalculationsBEY = 2 * [ ( 1 + MCFY)^3- 1 ]BEY = Bond-Equivalent YieldMCFY = Monthly Cash Flow Yield 9
    • Types Of MBS yields B ) Bond Equivalent Yield For instance ; The Previous section BEY is 13.7 percent , can be calculated BEY = 2 * [ ( 1 + 0.0111 )^6 – 1 ] = 0. 137 , AbbreviationBEY = 2 * [ ( 1 + MCFY)^3- 1 ]BEY = Bond-Equivalent YieldMCFY = Monthly Cash Flow Yield 10
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