Glossary For Fixed Income Mortgage Securities
Accrued Interest – Interest earned but not yet paid
Adjusted-Rate Mortgage (ARM) – A mortgage loan with an interest rate and payment that change periodically over the life of the loan.
Adjusted-Rate Class – A REMIC class with an interest rate that changes periodically over the life of the class (see Floating-Rate Class and inverse Floating-Rate Class).
Amortize – To repay a debt through a series of periodic payments.
Average Life – (see Weighted Average Life)
Balloon Mortgage – A short- term mortgage in which small periodic payments are made until the completion of the term at which time the balance is due as a single lump sum.
Book Entry – An electronic issuance and transfer system for securities transactions, such as that maintained by the Federal Reserve System. Unless otherwise stated in the prospectus supplement, Fannie Mae REMICs are issued in book-entry form.
Call Risk – The possibility that pre-payment will increase above an anticipated rate causing earlier –than expected return of principal, usually during a time of falling interest rates
Cap – The maximum rate of interest payable on an adjustable rate security or mortgage loan.
CLASS – (see Bond)
CMO (Collateralized Mortgage Obligation) – A multiple- class mortgage –back security. The REMIC has replaced the CMO and, today, all CMOs are issued in the form of REMICs; however, the terms are often used the interchangeably.
CMT (Constant Maturity Treasury) – An index published by the Federal Reserve Board calculated from the average yield of a range of Treasury securities adjusted to constant maturities of various time periods (for example, six months, one year, ten years etc.)
COFi (Cost of Funds index) – An index of the weighted average interest rate paid by savings institutions for sources of funds, usually by members of the 11th Federal Home Loan Bank District
Collateral – In the case of Fannie Mae REMICs, assets that back the REMIC.
Companion or Support Class – A REMIC class that absorbs the prepayment variability removed from reduced volatility classes such as PACs or TACs
Coupon Rate – The stated annualized percentage of interest paid on investment
CPR (Constant Prepayment Rate) – A Prepayment measure calculated by assuming that a constant portion of the outstanding mortgage loans will prepay each month. (also see PSA)
Credit Risk – The possibility that there may be a default by the issuer or other party in its financial obligation to the investor.
Current Face Value – The current amount of principal outstanding on a security, which is calculated by multiplying the original face value by the most recent factor.
Current Pay Class – A term used for any REMIC class that is currently paying principal and/or interest.
CUSIP Number – A unique, nine-digit number assigned to each publicly traded security maintained and transferred on the Federal Reserve book- entry system
Default – Failure to perform an obligation. (In the case of a note or mortgage loan, Usually by non-payment of principal and interest rate installments).
Discount – The amount by which the purchase price of a security is less than its face value, which has the effect of raising the effective yield of the security above the coupon rate.
Distribution Date – The date on which payments from a security to an investor are made (usually the 25th of the month for Fannie Mae REMIC securities)
Effective Yield – The annual return on an investment that is calculated by dividing the coupon interest rate by the amount invested expressed as a percentage of par.
Effective Range – The range of upper and lower constant prepayment speeds at which a PAC Schedule will hold. The effective range can change over time depending on the prepayment experience of the securities backing REMIC and can widen or narrow in relation to the original stated PAC band. (see PAC Schedule and PAC Band)
Extension Risk – The possibility that prepayments will be slower than an anticipated rate causing later than expected return of Principal. This usually occurs during times of rising interest rates.
Face Value – The principal amount of a bond
Factor – The decimal value, calculated monthly, that represents the proportion of the original principal amount outstanding at a given time.
Final Distribution Date or Maturity Date – The latest possible date on which a REMIC class will receive payment. The actual final payment of any class will likely occur earlier, and could occur much earlier, than the final distribution date or maturity. A projected final maturity is calculate based on an assumed prepayment rate to determine the final maturity of each class.
Fixed-Rate Mortgage – A mortgage loan with an interest rate and payments that do not change over life of the loan.
Fixed-Rate Class – A REMIC class with an interest rate that does not change over the life of the class
Floating-Rate Class (“Floater”) – A REMIC class that pays interest at a rate that adjusts periodically by a predetermined amount above a specific index
Floor – The minimum rate of interest payable on an adjustable rate class or mortgage
Index – A published interest rate used to determine the interest rate payable on an adjustable rate mortgage or class.
Interest – The amount paid for the use of money, usually expressed as an annual percentage rate.
Inverse Floating-Rate Class (“Inverse Floater”) – A REMIC class that pays an interest rate that adjust periodically in the opposite direction of a specific index. Inverse floater adjustments may also be based on a multiple of the index.
IO (Interest Only) Class – A REMIC class that pays the investor some or all of the interest payments on the underlying securities and little or no principal. IO classes have either a nominal or notional principle balance. A nominal principal balance represents the actual but relatively small amount of principal that will be paid to the class. A notional principal balance is the amount used as a reference to calculate the amount of interest due on an IO class not entitled to receive any principal. Declining interest rates have an adverse effect on IOs.
Issued Date – The date as of which a security is originally formed.
LIBOR (London Interbank Offered Rate) – The interest rate charged among banks for short-term Eurodollar loans. A common index for adjustable-rate mortgage and securities.
Liquidity – The capability of ready conversion of an asset or investment to cash.
Lock Out – The period of time before a REMIC investor will begin receiving principal payments.
Market Price – The current price of the security in the market
Market Risk – The possibility that the price of the security will change over time.
Maturity Date – (see Final Distribution)
MBS (Mortgage-Backed Securities) – An investment instrument that represents ownership of an undivided interest in the group of mortgages. Principal and interest from the individual mortgages are used to pay principal and interest on the MBS.
Mortgage – A pledge of real property as security for the repayment of a debt; the document that creates and represents the lien upon the real property that secures the debt.
Mortgage pass-through Security – A security representing a direct interest in a pool of mortgage loans. The pass through issuer or servicer collects the payments on the loans in the pool and “passes-through” the principal and interest to the security are also know as mortgage- backed securities (MBS) and Participation certificates (PC)
Mortgage Principal Window – The month and year of the first and last principal payments, calculated using prepayment defaults.
Negative Convexity – A characteristic of REMIC and other callable or prepayable securities that cause investors to have their principal returned sooner than expected in a declining interest rate environment or later than expected in a rising interest rate environment. In the former scenario, investors my have to reinvest their funds at lower rates (“call risk”); in the later they may miss an opportunity to earn higher rates (extension risk”).
Option Risk – The possibility that a borrower may prepay a mortgage in a time frame that adversely affects the investor’s yield.
Original Face Value – The original principal amount of a security on its issue date.
PAC (Planned Amortization Class) – A REMIC Class designed to pay investors scheduled payments over a range of constant prepayment speeds.
PAC Band or Range – A range of constant prepayment speeds defined by a minimum and maximum under which the PACs scheduled repayment will remain unchanged. There can be multiple levels of PACs in a REMIC, each having successively narrower PAC bands. The widest band PACs are PAC Is; the next are PAC IIs.
PAC Schedule – The planned monthly principal balances of a PAC class in which the underlying securities prepay at a constant prepayment rate within the stated PAC band
PAC Window – The time period during which a PAC class is scheduled to receive principal payments.
Par – 100 percent of face value
Plain Vanilla – (see Sequential Class)
PO (Principal Only) Class – A REMIC class that does not bear interest and is entitled to receive only payments of principal. Rising interest rates will have an adverse effect on Pos
Pool – A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgages pass- through securities, pools are identified by a number assigned by the issuing agency.
Premium – A price in excess of 100 percent face value.
Prepayment – The unscheduled payment of all or part of the outstanding principal of a mortgage loan, including payments by the borrower as well as liquidations from forclosures, condemnations, or casualty.
Prepayment Risk – The posssiblty that the mortgages underlying the security are repaid faster or more slowly the expected.
Price – The amount paid for a security, usually stated as a percentage of its face value. A par price is 100 percent, a premium price is higher than par. While a discount price is lower than par.
Principal – The remaining balance of a security or loan, exclusive of accrued interest.
Private Label – A mortgage security not issued or guaranteed by a U.S. government agency (such as Ginnie Mae) or a U.S. government-sponsored enterprise (such as Fannie Mae or Freddie Mac)
Prospectus and Prospectus Supplement – The legal documents that outline all details of an investment.
PSA (Public Securities Association) – The national trade association of banks, dealers, and brokers that underwrite, trade, and distribute mortgage – backed securities, U.S government and federal agency securities, and municipal securities.
PSA prepayment speed – A measure of the rate of prepayment of mortgage loans developed by the PSA. This model represents an assumed rate of prepayment each month of the then outstanding principal balance of a pool of new mortgage loans. A 100 percent PSA assumes prepayment rates of 0.2 percent per annum of the then unpaid principal balance of mortgage loans in the first month after origination and an increase of an additional 0.2 percent per annum in each month thereafter ( for example , 0.4 percent per annum in the second month) until the 30th month. Beginning in the 30th month and in each month there after, 100 percent PSA assumes a constant annual prepayment rate (CPR) of 6 percent. Multiples are calculated from this prepayment rate; for example, 150 percent PSA assumes annual prepayment rates will be 0.3 percent in month one, 0.6 percent in month two, reaching 9 percent in month 30 and remaining constant at 9 percent thereafter. A 0 percent PSA assumes prepayment
PSA Standard Prepayment Model – A model based on historical mortgage prepayment rates that is used to estimate prepayment rates on mortgage securities. The PSA model is based on the Constant Prepayment Rate (CPR), which annualized the single Monthly Mortality (SMM) or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as percentage of PSA. A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2 % CPR in the first month, 0.4% CPR in the second month, and 0.6% CPR in the third month, 0.2% increases in every month thereafter until the thirtieth month when the rate reaches 6%. From the thirtieth month when the rate reaches 6% from the thirtieth month until the mortgage loan reaches maturity. 100% PSA equals 6% CPR
Ratings: Designations used by investors’ services to give relative indications of credit quality.
Record Date: The date for determining the owner entitled to the next scheduled payment of principal or interest on the mortgage security.
REMIC (Real Estate Mortgage Investment Conduit) – As a result of a change in the 1986 Tax Reform Act, most CMOs are today issued in REMIC form to create certain tax advantages for the issuer. The terms CMO and REMIC are now used interchangeably.
Residual – In the REMIC, the residual is that tranche which collects ay cash-flow from the collateral that remains after obligations to the other tranches have been met.
Scenario Analysis – An examination of expected investment performance over a variety of assumed economic conditions.
Secondary Mortgage Market – The market in which existing mortgages or mortgage securities are bought and sold.
Sequential Pay REMIC – The most basic type Of REMIC in which all tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payment is applied to the second trance until it is fully retired and so on.
Settlement Date – The date of the delivery of and payment for a security
Stripped Mortgage-Backed Security (SMBS) – A mortgage security that separates principal and interest payments from the underlying mortgage-backed securities.
Supper Floater – A floating rate class that pays a rate of interest that resets periodically as a multiple of the benchmark index
Support Class – (see Companion Class)
TAC (Targeted Amortization Class) – A REMIC Class designed to provide investors with a payment schedule that will hold at a single, constant prepayment speed. Prepayments in excess of the predefined prepayment speed are allocated to companion classes and do not affect the TAC class. If prepayments fall below the predefined speed, however, the TA class will have slower principal repayment and its average life will extend.
Tranche- French word for “slice” a class of investment interest in a REMIC.
WAC (Weighted-average coupon) – The weighted average of the interest rates on the mortgage loans underlying the MBS that back the REMIC or the weighted average of the WACs of the individual MBS pools backing the REMIC.
WAL (weighted –average Life) – The average amount of time that will elapse from the date of the security issuance until each dollar of principal is repaid to the investors. The weighted –average life of each class of REMIC is only an assumption. The average amount of time that each dollar of principal is actually outstanding is influenced by among other factors, the rate at which principal, both scheduled and unscheduled, is paid on the mortgage loans underlying the MBS that back REMIC.
WAM (Weighted- average maturity) – The weighted average of the remaining terms to maturity (expressed in months) of the mortgage loans underlying the MBS or the weighted average of the remaining terms to maturity of the individual MBS pools backing the REMIC
Yield – The rate of return on an investment over a given time, expressed as an annual percentage rate. Yield is affected by the price paid for the investment as well as the timing of principal repayments
Yield to Maturity – The annual percentage rate of return on an investment assuming it is held to maturity.
Z Class – A REMIC class that pays no cash flow to the investor until certain other classes are paid off or some other specified event occurs. The interest earned but not paid increases the principal balance of the class. Once the previous classes have paid off or the specified event occurs, the Z class becomes an interest –paying amortizing class.