Mortgage Pass Thrus

[New at pd]

I have a couple of questions:

1) How are the interest rate of the mortgage and coupon rate of the MBS related?

2) JAM says that prepayment risk is most likely when the coupon rate of an MBS is between 100 and 300 bps above current mortgage rates, because in this range it becomes worthwhile for a person to pay the fee to refinance. (page A-50)
If by "person" Carmody means "investor" then I have two questions --
Why do I care about the relation of the coupon rate to current mortgage rates?
If Carmody doesn't mean the investor, then I have no idea what he's saying, and a clue would be greatly appreciated.

Thanks in advance for any help.

<font size=-1>[ This Message was edited by: New at c6 on 2002-01-29 10:36 ]</font>

[Anonymous]

1) How are the interest rate of the mortgage and coupon rate of the MBS related?


deduct the servicing fee paid to the entity which services the mortgage, say 50 bp ... I take out a mortgage @ 6.75% with bank X ... they resell it, where it's packaged with other mortgages and MBS's are issued with say, a 6.25% coupon



2) JAM says that prepayment risk is most likely when the coupon rate of an MBS is between 100 and 300 bps above current mortgage rates, because in this range it becomes worthwhile for a person to pay the fee to refinance. (page A-50)
If by "person" Carmody means "investor" then I have two questions --
Why do I care about the relation of the coupon rate to current mortgage rates?
If Carmody doesn't mean the investor, then I have no idea what he's saying, and a clue would be greatly appreciated.


The "person" refers to the homeowner who took out the mortgage in the first place. If I've got a mortgage at 9% and current rates are 7%, I obviously have an incentive to refinance, in which case the prepayments will increase for those holding a piece of my "old" mortgage. I prepay, you get your money back and have to reinvest it at current rates of 7% instead of the 9% you were expecting.

[New at pd]

That's perfectly clear. Thank you so much.

[OT]

Yup, I think Bashful said it well.

I could be mistaken a little here but I recall that the individual securitizing mortgages often times have different interest rates. As such for the amortization of the pass-through, the weighted average coupon/interest (WAC) rate is determined -- from which the servicing fee is deducted. The mortgage pass-through then amortizes according the (WAC, less servicing fee) with a maturity of the weighted average loan age (WALA). Payment delays and guarantees vary according to pass-through originator/agency.

<font size=-1>[ This Message was edited by: OT on 2002-01-29 15:41 ]</font>