Athens First S&L originated a pool containing 75 ten-year fully amortizing fixed interest rate mortgages with an average balance of $100,000 each. All mortgages in the pool carry an interest rate of 12% and have annual payments.

Assume that Athens First charged one point in up-front fees on all of the loans originated in the pool, and they have decided to securitize the mortgages by issuing 100 pass-through securities.[1] The mortgage servicing fee will be 50 basis points, and there are no guarantee fees. The current market rate of return used to price the mortgage securities is 12.25%. Assume an annual prepayment rate of 5% (as above, there will be prepayment in years 1-9) and no defaults. In addition to selling off the securities, Athens First will also sell off the mortgage servicing rights (MSR).

1. What is the discount rate for purchasing MSR (OCC for MSR) that would cause Athens First to exactly break even on the entire deal (profit on sale of mortgages + profit on sale of MSR = 0)? [Hint: I recommend using Excel Solver to get this answer].

2. If the discount rate for purchasing MSR (OCC for MSR) is 13%, what is the profit (loss) for Athens First on the entire deal [Profit on Sale of Mortgages + Profit on Sale of MSR]