2. What is Mortgage System ?
A mortgage is a loan secured by real
property through the use of a mortgage note which
evidences the existence of the loan and the
encumbrance of that realty through the granting of
a mortgage which secures the loan .
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3. About Mortgage System Process
Mortgage loans are originated by Lenders such as
savings and loan associations , commercial banks and
mortgage banks .Lenders originating loans for their
own portfolios are called portfolio Lenders and and
some of Lenders originate loans but do not plan to keep
the loans in their portfolios are called secondary
Lenders . the secondary Lenders may sell the loans to
secondary market agencies –Fannie Mae and Freddie
Mac .
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4. Fannie Mae
Fannie Mae, was founded in 1938 during the Great
Depression as part of the New Deal. It is a government-
sponsored enterprise (GSE), though it has been a
publicly traded company since 1968. The corporation's
purpose is to expand the secondary mortgage
market by securitizing mortgages in the form
of mortgage-backed securities (MBS), allowing lenders
to reinvest their assets into more lending and in effect
increasing the number of lenders in the mortgage
market by reducing the reliance on thrifts .
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5. 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.
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6. 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 ).
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7. 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.
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8. 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 )
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9. 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
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10. 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
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