Suppose that a savings and loan association has decided to invest in mortgage-backed securities and is considering the following two securities: (i) a Freddie Mac pass-through security with a WAM of 340 months or (ii) a PAC tranche of a Freddie Mac CMO issue with an average life of two years. Which mortgage-backed security would probably be better from an asset/liability perspective?
Answer to relevant QuestionsSuppose that a PAC bond is created assuming prepayments speeds of 80 PSA and 350 PSA. If the collateral pays at 100 PSA over its life, what will this PAC tranche’s average life be? Suppose that for the first four years of a CMO, prepayments are well within the initial PAC collar. What will happen to the effective upper collar? Suppose that 8% coupon pass-throughs are stripped into two classes. Class X-1 receives 75% of the principal and 10% of the interest. Class X-2 receives 25% of the principal and 90% of the interest. Answer the below ...Answer the below questions. a. Why is it necessary for a nonagency mortgage-backed security to have credit enhancement? b. Who determines the amount of credit enhancement needed? There are some mortgage loans that are balloon loans. This means that when the loan matures, there is a mortgage balance that will require financing. It is the responsibility of the borrower to obtain the refinancing. What ...
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