Learning outcomes: Describe the mortgage prepayment option and the factors that influence prepayments. Summarize the securitization process of mortgage backed securities (MBS), particularly formation of mortgage pools including specific pools and TBAs. Calculate weighted average coupon, weighted average maturity, and conditional prepayment rate (CPR) for a mortgage pool.
Questions:
501.1. After five years (60 monthly payments), the outstanding balance on a mortgage is $89,850.00 when the original balance was $100,000. The mortgage is a 30 year fixed rate mortgage (FRM) and each monthly payment is $454.65. As Tuckman explains, "The prepayment option is valuable when mortgage rates have fallen. In that case, as mentioned previously, the present value of the remaining monthly payments exceeds the principal outstanding." (Source: Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Today’s Markets, 3rd Edition (New York: Wiley, 2011))
If we ignore transaction costs, according to Tuckman's principle, what is the highest mortgage rate at which prepayment (for example, refinance) is financially desirable?
a. 1.99%
b. 2.75%
c. 3.60%
d. 4.29%
501.2. If a pool of mortgages starts the year with a principal balance of $10.0 million and the single monthly mortality rate, SMM(n), is constant at 1.0%, which is nearest to the principal that prepays over the next twelve months (not including scheduled principal)?
a. $1,136,151
b. $1,200,000
c. $8,800,000
d. $8,863,849
501.3. In regard to mortgages and mortgage-backed securities, each of the following is true EXCEPT which is false?
a. In a mortgage pass-through, the cash flows from the underlying mortgages (i.e., interest, scheduled principal, and prepayments) are passed from the borrowers to the investors
b. A recourse loan is better for the borrower because it means that the borrower can seek a so-called short sale if the value of the house is less than the outstanding principal balance on the mortgage loan
c. Mortgage servicers manage the flow of cash from borrowers to investors in exchange for a fee taken from those cash flows; mortgage guarantors guarantee investors the payment of interest and principal against borrower defaults, also in exchange for a fee
d. When a borrower does default, the guarantor compensates the pool with a lump-sum payment and then, through the servicer, pursues the borrower and the underlying property to recover as much of the amount paid as possible
Answers here:
Questions:
501.1. After five years (60 monthly payments), the outstanding balance on a mortgage is $89,850.00 when the original balance was $100,000. The mortgage is a 30 year fixed rate mortgage (FRM) and each monthly payment is $454.65. As Tuckman explains, "The prepayment option is valuable when mortgage rates have fallen. In that case, as mentioned previously, the present value of the remaining monthly payments exceeds the principal outstanding." (Source: Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Today’s Markets, 3rd Edition (New York: Wiley, 2011))
If we ignore transaction costs, according to Tuckman's principle, what is the highest mortgage rate at which prepayment (for example, refinance) is financially desirable?
a. 1.99%
b. 2.75%
c. 3.60%
d. 4.29%
501.2. If a pool of mortgages starts the year with a principal balance of $10.0 million and the single monthly mortality rate, SMM(n), is constant at 1.0%, which is nearest to the principal that prepays over the next twelve months (not including scheduled principal)?
a. $1,136,151
b. $1,200,000
c. $8,800,000
d. $8,863,849
501.3. In regard to mortgages and mortgage-backed securities, each of the following is true EXCEPT which is false?
a. In a mortgage pass-through, the cash flows from the underlying mortgages (i.e., interest, scheduled principal, and prepayments) are passed from the borrowers to the investors
b. A recourse loan is better for the borrower because it means that the borrower can seek a so-called short sale if the value of the house is less than the outstanding principal balance on the mortgage loan
c. Mortgage servicers manage the flow of cash from borrowers to investors in exchange for a fee taken from those cash flows; mortgage guarantors guarantee investors the payment of interest and principal against borrower defaults, also in exchange for a fee
d. When a borrower does default, the guarantor compensates the pool with a lump-sum payment and then, through the servicer, pursues the borrower and the underlying property to recover as much of the amount paid as possible
Answers here:
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