Chapter 13

Mortgage-Backed Securities
• A Brief History of Mortgage-Backed Securities
• Fixed-Rate Mortgages
• Government National Mortgage Association
• Public Securities Association Mortgage Prepayment
Model
• Cash-Flow Analysis of GNMA Fully Modified
Mortgage Pools
• Collateralized Mortgage Obligations
• Yields for Mortgage-Backed Securities &
Collateralized Mortgage Obligations
• Summary & Conclusions
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 A Brief History & Fixed Rate Mortgages

• Mortgage pass-throughs
• Mortgage-backed securities (MBSs)
• Mortgage securitization
• Fixed-rate mortgages
• Mortgage principal
• Mortgage amortization
• Mortgage prepayment

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 Constant Monthly Payment Example

loan amt  r
Monthly payment  12
1
1

1 r
12
 T12

For a $90,000, 30 year, 11% mortgage, the

payment is:
$90,000  .11
Monthly payment  12  $857.09
1
1
1 
. 11
12
3012

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 Table 13.1: $100,000 mortgage loan monthly payments

Mortgage maturity
Interest 30-year 20-year 15-year 10-year 5-year
Rate (% )
5.0 $536.82 $659.96 $790.79 $1,060.66 $1,887.12
6.0 599.55 716.43 843.86 1,110.21 1,933.28
7.0 665.30 775.30 898.83 1,161.08 1,980.12
8.0 733.76 836.44 955.65 1,213.28 2,027.64
9.0 804.62 899.73 1,014.27 1,266.76 2,075.84
10.0 877.57 965.02 1,074.61 1,321.51 2,124.70
11.0 952.32 1,032.19 1,136.60 1,377.50 2,174.24
12.0 1,028.61 1,101.09 1,200.17 1,434.71 2,224.44
13.0 1,106.20 1,171.58 1,265.24 1,493.11 2,275.31
14.0 1,184.87 1,243.52 1,331.74 1,552.66 2,326.83
15.0 1,264.44 1,316.79 1,399.59 1,613.35 2,378.99

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 Table 13.2: $100,000 mortgage loan amortization schedules for
15-year and 30-year mortgages

30-year mortgage 15-year mortgage

$733.76 monthly payment $955.65 monthly payment
Payment Remaining Principal Interest Payment Remaining Principal Interest
month principal reduction payment month principal reduction payment

1 $99,932.28 $67.10 $666.66 1 $99,710.80 $288.98 $666.67

12 99,164.02 72.19 661.57 12 96,401.94 310.90 644.75
24 98,259.32 78.18 655.58 24 92,505.48 336.70 618.95
36 97,279.54 84.67 649.09 36 88,285.62 364.65 591.00
48 96,218.44 91.69 642.07 48 83,715.51 394.91 560.74
60 95,069.26 99.30 634.46 60 78,766.09 427.69 527.96
72 93,824.71 107.54 626.22 72 73,405.86 463.19 492.46
84 92,476.86 116.47 617.29 84 67,600.74 501.63 454.02
96 91,017.13 126.14 607.62 96 61,313.80 543.27 412.38
108 89,436.25 136.61 597.15 108 54,505.04 588.36 367.29
120 87,724.16 147.95 585.81 120 47,131.16 637.19 318.46
132 85,869.96 160.23 573.53 132 39,145.25 690.08 265.57
144 83,861.87 173.52 560.24 144 30,496.52 747.36 208.29
156 81,687.10 187.93 545.83 156 21,129.94 809.39 146.26
168 79,331.84 203.52 530.24 168 10,985.94 876.57 79.08
180 76,781.08 220.42 513.34 180 0.00 949.32 6.33
348 8,435.14 673.04 60.72
360 0.00 728.90 4.86
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 Figure 13.1a: Outstanding mortgage principal
($100,000 mortgage 8% financing rate)

$100,000
Outstanding principal

$80,000

$60,000

$40,000

$20,000

$0
0 60 120 180 240 300 360
Age of mortgage (months)

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 Figure 13.1b: Mortgage payment components
($100,000 mortgage 8% financing rate)

$700

$600 Payment of interest

Monthly Payments

$500

$400

$300

$200

$100 Amortization of principal

$0
0 60 120 180 240 300 360
Age of mortgage (months)
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 Government National Mortgage Association
• GNMA
• Mortgage pools: FHA, VA, FMHA
• Fully modified
• Prepayment risk
• GNMA bond
• GNMA clones:
• Federal Home Loan Mortgage Corporation
(FHLMC)
• Federal National Mortgage Association
(FNMA)
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 PSA Mortgage Prepayment Model

• Prepayment rate
• Public Securities Association (PSA)
• Seasoned versus unseasoned mortgages
• Conditional prepayment rates (CPRs)
• Single monthly mortality (SMM)
SMM = 1 - (1 - CPR)1/12
• Average life
• Deviations from 100 PSA benchmark are
stated as percent of benchmark (50 PSA)
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 PSA Mortgage Prepayment Model
• Prepayments benchmark:
• Annual prepayment rate of .2% in month 1
• Annual prepayment rate of .4% in month 2
• Annual prepayment rate of .6% in month 3
• Continues to rise by .2% per month until
reaching 6% in month 30
Prepayment Schedule Avg Mortgage Life (yrs)
50 PSA 20.40
100 PSA 14.68
200 PSA 8.87
400 PSA 4.88 13-10
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 Figure 13.2. PSA prepayment model
conditional prepayment rates (CPR)

14

12
PSA 200
10
CPR (%)

6
PSA 100
4

2 PSA 50

0
0 60 120 180 240 300 360
Age of mortgage (months)
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 Cash Flow Analysis of GNMA Pools

• Each monthly cash flow has:

1. Interest payment on outstanding principal
2. Scheduled amortization of principal
3. Mortgage principal prepayments
• GNMA investors face substantial cash flow
uncertainty
• Prepayment risk / interest rate risk
• Macaulay Duration???

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 Figure 13.3a: GNMA bond principal
($100,000 par value 30-year 8% bonds)

$100,000
$90,000
Outstanding principal

$80,000
$70,000
$60,000
$50,000
$40,000 PSA 50
$30,000 PSA 200
$20,000 PSA 100
$10,000 PSA 400
$0
0 60 120 180 240 300 360
Age of mortgage pool (months)
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 Figure 13.3b: GNMA bond cashflows
($100,000 par value 30-year 8% bonds)

$2,000
$1,800
$1,600
$1,400
Cashflows

$1,200
$1,000
$800
$600
$400 PSA 50
PSA 400 PSA 200 PSA 100
$200
$0
0 60 120 180 240 300 360
Age of mortgage pool (months)

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 Collateralized Mortgage Obligations
• CMOs
• Best known types:
• Interest-only (IO)
• Principal-only (PO) (strips)
• Sequential CMOs
• Protected amortization class securities
(PACs)
• Sequential CMOs
• Tranche
• Cash flow yield
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 Protected Amortization Class Bonds

• PAC
• PAC support bonds (companion bonds)
• PAC collar
• Contingency rules

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 Problem 13-3

What is the monthly payment on a 30-year fixed

rate mortgage if the original balance is $180,000
and the rate is 8%?

Solution:
$180,000  .08
Monthly payment  12  $1,320.78
1
1

1 . 08
12

3012

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 Problem 13-6

If a mortgage has monthly payments of $1,000, a

life of 30 years, and a rate of 6% per year, what
is the mortgage amount?

Solution:
Mortgage balance  .06
$1,000  12  M.B.  $169,552.25
1
1

1 . 06
12

3012

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 Problem 13-16

What is the single-month mortality for seasoned 50

PSA, 200 PSA, and 400 PSA mortgages? How do
you interpret these numbers?

Solution:
SMM = 1 - (1 - CPR)1/12
50 PSA = .254%
200 PSA = 1.06%
400 PSA = 2.26%
Notice 400 PSA is not double the 200 PSA, there is a
compound interest-type effect.
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