A dominant aspect of the US economy is widespread home ownership (owner-occupied housing). In the 2000 Census, 66.2% of American households owned their own home. This compares to a homeownership rate of less than 50% in 1890, and 43.6% in 1940.
MBS do not trade in the same manner as treasuries or even corporate debt. Most trades are conducted on a TBA basis, where the basic structure of a security, but not the specific security is agreed to trade. This is meant to make for fungibility in the MBS market. So a trade specifies the WAC, WAM, prepayment history, and then most trades will actually comprise securities from several pools.
Most trading in MBS occurs according to a schedule established by the Public Securities Association. I take the following time-line example from Tierney & Moore’s Chapter 5 from The Handbook of Mortgage-Backed Securities , (Fabozzi, ed.) 1995.
On June 18, the portfolio manager calls a dealer and agrees to buy a 30-Yr FannieMae pass-through with $1 million face value, coupon 8.5%. Agreed upon price: 102 47/64 w/ no other characteristics specified.
On the settlement date, the portfolio manager receives notice that Fedwire has credited its securities account and debited its cash account.
On the last day of the month (July 31) Fedwire surveys all accounts and records our portfolio manager as the owner of record if its purchased MBS.
On the 4 th business day of the month (Aug. 6) Fannie Mae releases pool factors. Fannie Mae pass-throughs pay coupons on the 25 th of the month to holders of the last record date. The interest and principal payment will be credited to the manager’s account via Fedwire.
The “factor” in this case is the remaining principal multiplier for the previous month. This is multiplied by the original principal x the passthrough rate x 1/12 to come up with this month’s interest cash flow.