learn more...Agency securities are obligations issued by the government throughvarious political subdivisions. Most federal agency securities are notobligations of the US Treasury.
Agency mortgage-backedsecurities are issued by Fannie Mae, Freddie Macand Ginnie Mae, with pools of mortgage loans as collaterals. Each month thetotal of all interest and principal payments made by the mortgage loans in thepool, less a servicing spread, goes to the security holders. Therefore the cashflows from a mortgage-backed security are determined by cash flows from theunderlying mortgage loans. Note that the cash flows of a mortgage-backed security is differentfrom the monthly mortgage payments of the underlying mortgage loans. There aretwo factors that cause the discrepancy:
Therefore the monthly cash flows of a mortgage-backed security havethree components: net interest, scheduled principal repayment and prepayment. There are three types of mortgage-backed securities:
A mortgage passthroughsecurity is a security created when one or more holders of mortgages form acollection of mortgages and sell shares or participationcertificates in the pool. The mortgage is said to be securitized if it is included in such a pool. Loans that meet therequirements of Fannie Mae, Freddie Mac and Ginnie Mae's are called conforming loans. The cash flow of apassthrough depends on the cash flow of the underlying pool of mortgages. Themonthly payments are passed through to the certificate holders on a pro ratabasis. An investor of a passthrough gains the diversification benefits -- theprepayment risk now is spread over a pool of mortgages. A mortgage loan issecured by the collateral of some real estate property. The interest rate onthe mortgage loan is called the mortgagerate or contract rate. If theborrower defaults, the lender has the right to foreclose on the loan and seizethe property to ensure the timely payment of the debt. There are many types ofmortgage designs available in the US. Themost common type has the following characteristics: fixed interest rate,level-payment, fully amortized (no mortgage balance outstanding at the end ofthe loan term). The monthly payment of a mortgage loan has two components:
Early mortgage payments mostly go toward interest. As the mortgagebalance is paid down, more and more mortgage payments are used to repayprincipal. |
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