Financed by mortgage-backed bonds (also called mortgage pass-throughs ), each mortgage pool is set up as a trust fund. A servicing agent collects the mortgage payments and then passes the cash flows through to the bondholders.
The transformation from mortgages to mortgage-backed securities (MBSs) is called mortgage securitization .
The size of the monthly payment is determined by the requirement that the present value of all monthly payments, based on the financing rate specified in the mortgage contract, be equal to the original loan amount.
Fixed-rate mortgage Loan that specifies constant monthly payments at a fixed interest rate over the life of the mortgage.
A mortgage borrower has the right to pay off all or part of the mortgage ahead of its amortization schedule. This is similar to the call feature of corporate bonds and is known as mortgage prepayment .
During periods of falling interest rates, mortgage refinancings are an important reason for mortgage prepayments.
Hence, mortgage investors face the risk of a reduced rate of return.
The Government National Mortgage Association (GNMA), or “Ginnie Mae,” is a government agency charged with the mission of promoting liquidity in the secondary market for home mortgages.
GNMA mortgage pools are based on mortgages issued under programs administered by the Federal Housing Administration (FHA), the Veteran’s Administration (VA), and the Farmer’s Home Administration (FmHA).
All payments of principal will go to the topmost tranche (in alphabetical order), until all the principal in that tranche has been paid off.
All tranches receive proportionate interest payments. These are passed through immediately, except for the Z-tranche. Interest on Z-tranche principal is paid as cash to the topmost tranche in exchange for a transfer of an equal amount of principal, until all the principal in the topmost tranche has been fully paid off.