Mortgage-Backed Securities Overview Flashcards

Which federal agency guarantees timely payment of principal and interest on mortgage-backed securities?

Answer: Ginnie Mae

Ginnie Mae (GNMA) is the only MBS guarantor backed by the full faith and credit of the U.S. government.

What is the primary risk that MBS investors face when interest rates decline significantly?

Answer: Prepayment risk

When rates fall, homeowners refinance, causing early principal return to MBS investors who must reinvest at lower yields — this is prepayment risk.

In a pass-through MBS, how are principal and interest payments distributed to investors?

Answer: Pro-rata based on ownership percentage

In a pass-through structure, all investors receive their proportional share of principal and interest payments after servicer fees.

What term describes the difference between the coupon rate on an MBS and the underlying mortgage rates?

Answer: Servicing spread

The servicing spread (or servicing fee) is the portion of mortgage interest retained by the servicer before passing the remainder to MBS investors.

Which measure represents the weighted average of the remaining terms to maturity of mortgages in an MBS pool?

Answer: Weighted Average Maturity (WAM)

WAM is the weighted average of remaining loan terms in the pool, indicating how long the pool's mortgages have left to run.

A CMO's planned amortization class (PAC) tranche provides investors with protection against which two risks?

Answer: Prepayment risk and extension risk

PAC tranches use support/companion tranches as buffers to absorb both faster-than-expected prepayments and slower-than-expected paydowns.

Which entity is responsible for servicing loans in an MBS pool after securitization?

Answer: The mortgage servicer

The mortgage servicer collects borrower payments, manages escrow, handles defaults, and remits funds to the MBS trust.