Cash flows from portfolio of us standard mortgages, Financial Management

The cash flows from a portfolio of US standard mortgages have the characteristic of being uncertain. The cash flows from the mortgage consists of three components, which are outstanding interest on the remaining principal, amortization due on the remaining principal and the principal prepayment which could be done as ordinary prepayment or as payment from an insurer in case of a default by the borrower. (However, in case the mortgage is not guaranteed or insured, then the above said cash flows will reduce due to the losses from default and insolvency).

The mortgage intermediary or the SPV sells these cash flow patterns to the investors. For this, the intermediary issues a liability which copies the cash flow structure or in case it wants to protect the investor from the uncertain cash flows of the mortgage, it needs huge amounts of equity and cash. In reality, the investors' claim includes apart from the cash flows, the insurance payment in case of a default by a borrower on higher-loan-to-value tranche of his mortgage. This results in an immediate and complete repayment of outsainding interest and principal.

A point to be remembered here is, though the pass-through MBS is totally severed from the balance sheet as it is issued by the SPV, it is still serviced by the originator.

Posted Date: 9/8/2012 8:05:49 AM | Location : United States







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