Mortgage Back Securities

- MP = MB0 [ i(1+i)n] / [(1+i)n – 1]

o MP [(1+i)n – 1] / i = MB0 [ (1+i)n]
 The future value of an annuity of mortgage payments = The future value of the original loan
o Present Value of an annuity derived: Sn = a(1-rn) / (1-r) = a + a(1+r) + a(1+r)2 + … + a(1+r)n
 MB0 [ (1+i)n] = MP + MP (1+i)1 + MP (1+i)2 + … + MP (1+i)n = [ MP (1 – (1+i)n) ] / [ 1- (1+i) ]
= [ MP ( (1+i)n) -1 ) ] / i
- Key Attributes that Define Mortgages
o Lien status/ original term loan
 Lien status – first lien (first cal on liquidation proceeds)
 Original loan term – loans with shorter terms amortize more quickly
o Credit classification
 Prime loans - low delinquency and default vs Subprime Loans
 Credit Score (FICO, Experian, Transunion) > 660
 LTV < 90%
o Original LTV: time the loan was orginated vs current LTV (CuLTV; Market)
 Alternative-A Loans - were once prime loans but are in between prime and subprime
o Interest rate type
o Amortization type
o Credit Guarantees
o Loan Balances
o Prepayments and prepayment penalties

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