1. Chapter 24 MORTGAGE-BACKED SECURITIES MARKET

2. Mortgage-Backed Securities zMortgage Pass-Through Securities zDerivative Mortgage-Backed Securities yCollateralized Mortgage Obligations yStripped Mortgage-Backed Securities

3. Asset Securitization zOriginate mortgage zSell mortgage to investment banking firm zInsure pool of mortgages zSell right to service loans zSell securities collateralized by mortgages to investors

4. Foundations of the Mortgage Market zFederal Home Loan Banks (FHLBs) zFederal Housing Administration (FHA) zFederal National Mortgage Association (FNMA) yFannie Mae yGinnie Mae

5. Mortgage Pass-Through Securities zCreated when one or more holders of mortgages form a pool of mortgages and sell shares in the pool. zFeatures ymore liquid ysecuritized

6. Cash Flow Characteristics zMonthly mortgage payments yinterest yprincipal repayment zTiming of monthly mortgage payments and payments made to investors is not identical zMagnitude of monthly mortgage payments is greater than payments for pass-through securities yservicing fee yother fees

7. Issuers of Mortgage Pass- Through Securities zGovernment National Mortgage Association zFederal Home Loan Mortgage Corporation zFederal National Mortgage Association

8. Nonagency Pass-Through Securities zConforming mortgages zNonconforming mortgages zJumbo loans zNonagency pass-throughs

9. Issuers of Nonagency Pass-Throughs zCommercial Banks zInvestment Banking Firms zOthers

10. Credit Enhancements zCorporate Guarantees zPool insurance from a mortgage insurance company zBank letter of credit zSenior/subordinated interests

11. Prepayment Risk and Prepayment Conventions zPrepayment risk is the risk associated with prepayments yContraction risk yExtension risk zPrepayment Conventions yPrepayment speed yConditional prepayment rates ySingle-monthly mortality rate

12. Average Life zIt is the average time to receipts of principal payments weighted by the amount of principal expected. zThe average life of a pass-through depends on the PSA prepayment assumption.

13. Collateralized Mortgage Obligations zTranches zCollateralized Mortgage Obligations zTypes of Tranches ySequential-Pay CMOs yAccrual Bonds yPlanned Amortization Class Tranches yFloating-Rate Tranche yInverse Floating-Rate Tranche

14. Stripped Mortgage-Backed Securities zCreated by distributing principal and interest from pool of underlying mortgages on a pro rata basis to security holders. zFeatures yDerivative mortgage security yHedges prepayment risk zTypes: yPartially stripped securities yInterest-only/principal-only securities

15. Yields on Mortgage- Backed Securities zYields are a function of prepayment risk zYield calculation requires ydetermination of cash flow yprojections of prepayment zThe PSA convention is used