Understanding Original Face in MBS
The original face of a mortgage-backed security (MBS) refers to the total principal value of the loans included at the time the MBS is issued. This figure is also known colloquially as the par value of the home loans compiled from various banks, with investors earning returns based on these loans. The significance of the original face is that it provides a snapshot of the initial loan value contained within an MBS, but does not necessarily predict the future worth of the MBS, which is subject to change as the underlying loans are paid down.
Key Takeaways
- Original Face Definition: It represents the total outstanding balance of an MBS at issuance.
- Reduction Over Time: The value decreases as mortgage payments are made.
- Comparison with Current Face: Unlike the fixed original face, the current face value evolves over time based on repayment rates.
Original Face vs. Current Face
As borrowers chip away at their mortgages, the total outstanding balance decreases, referred to as the current face value. The original face remains a historical constant, reflecting the MBS’s initial balance, while the current face is dynamic, influenced by varying repayment speeds of borrowers.
The Dynamic Dance of the Pool Factor
Interpreting an MBS includes understanding the pool factor, an indicator of the residual principal. It’s calculated by the ratio of the current face to the original face. A new MBS starts with a pool factor of one, indicating full principal presence; this factor shrinks as loans are paid, reflecting how much of the original face remains.
Mortgage Refinancing and Interest Rate Risk
MBS dynamics are further complicated by refinancing, particularly when interest rates fall. This triggers faster repayments, accelerating the reduction of the pool factor, which can unsettle MBS investors by reducing expected incomes more swiftly than anticipated.
Related Terms
- Mortgage-Backed Security (MBS): A type of asset-backed security secured by a collection of mortgages.
- Par Value: Original stock value stated on the certificate; in MBS terms, it’s the total initial balance of loans.
- Pool Factor: Represents the percentage of the original loan amount that remains unpaid.
Recommended Reading
To further delve into the intricacies of mortgage-backed securities and original face calculations, consider the following:
- “Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques” by Frank J. Fabozzi - A comprehensive guide to the fundamentals and advanced strategies in handling MBS.
- “The Handbook of Mortgage-Backed Securities” by Frank J. Fabozzi - Provides an extensive overview of developments and investment opportunities within the mortgage security field.
This insightful journey through the roots and ramifications of the original face in mortgage-backed securities should equip investors and finance enthusiasts with a richer understanding and strategic outlook towards MBS investments. Whether your goal is to spice up your portfolio or just to savor the flavors of sophisticated financial instruments, knowing your way around the original face is invaluable.
