Mortgage-Backed Securities (MBS) - Pass-Through Mechanics

What this video covers

• How a lender pools mortgage loans and sells pro rata pass-through certificates, and why the pass-through rate is always lower than the borrower's mortgage rate (servicing and guarantee fees)
• Why MBS pay monthly (12 times a year) instead of semiannually like Treasuries, and the three components of every check: scheduled interest, scheduled principal, and prepayments
• Why prepayment risk is a timing risk, NOT default risk, and how the exam baits this distinction
• Contraction risk: when rates fall, borrowers refinance, principal returns early, and investors reinvest at lower prevailing rates
• Extension risk: when rates rise, borrowers hold their low-rate loans, principal returns late, and investors stay locked into below-market yields
• Why weighted average life (WAL) replaces stated maturity as the cash-flow estimate, and how WAL shifts with prepayment speeds
• The credit-guarantee distinction: Government National Mortgage Association (GNMA) carries an explicit full faith and credit U.S. government guarantee, while Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) carry only an implied government-sponsored enterprise (GSE) guarantee