2. Mortgage-Backed Securities Carolina Olsson Rebecca Nygårds-Kers MBS

3. Object for today Securitization Mortgage securities MBS Different types of MBS Risks

4. Securitization Securitization is the process of aggregating similar instruments, such as loans or mortgages, into a negotiable security. Investors Creditors Financial institution Privat Company/ Agency Action to improve the creditability

5. What is mortgage loan? A contract between two parties, a borrower and a lender What is mortgage security? A security made out of mortgage loans

6. MBS Mortgage backed security (MBS) is a security that is based on a pool of underlying mortgages OriginatorsPoolInvestors  Bank  Agency  Private Corp. "mortgage pass-through"  corporations  Life insurance companies  Pension funds

7. MBS Players in the secondary market : GNMA – Government National Mortgage Association FNMA – Federal National Mortgage Association FHLMC – Federal Home Loan Mortgage Corporation

8. Different types of MBS Collateralized mortgage obligations Stripped Mortgage-Backed securities

9. CMO  Bonds that represent claims to specific cash flows from large pools of home mortgages  Sequential pay Tranches  Planned Amortization Class (PAC) Tranches.  Targeted Amortization Class (TAC) Tranches  Z-Tranches  Principal-Only (PO) Securities  Interest-Only (IO) Securities  Floating-Rate Tranches Diffrent types of CMOs

10. Stripped MBS The cash flows from the underlying mortgage loans are divided to create two or more new securities. Principal-only (PO) and interest-only (IO).

11. Risks Prepayment Risk Average life Market Risk

12. Prepayment risk Prepayment can occur when the houseowner is selleing their house or refinancing the mortgage. The investor in a MBS is assumed a risk that the MBS will pay principal faster or slower than expected.

13. Average life When talking about the maturity date of Mortgage securities, we are talking about the average life of the security. The average life is the average time that each principal dollar in the pool is expected to be outstanding, based on certain assumptions about prepayment speeds.

14. Market risk The market risk is the risk that the price of the security may fluctuate over time

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