Mortgage-Backed Securities (MBS) - Pass-Through Mechanics
Chapters in this video
- 0:00 Pass-through mechanics: Carla to Riley the rep
- 0:51 The three monthly payment components: scheduled interest, scheduled principal, prepayments
- 2:48 Pass-through rate math and the servicing fee haircut
- 4:20 Prepayment risk and why maturity is replaced by weighted average life (WAL)
- 5:35 Contraction versus extension: the exam's risk-direction trap
- 6:50 GNMA explicit guarantee versus FNMA and FHLMC implied guarantees
- 7:57 Rapid-fire exam recap
What this video covers
- How mortgage payments flow from borrower to investor through the pool, and what pro rata share means for your client's slice
- Why mortgage-backed securities (MBS) pay monthly, not semiannually, and how the exam exploits this timing difference
- How the pass-through rate is calculated: mortgage rate minus servicing and guarantee fees, and why investors always receive the lower rate
- What weighted average life (WAL) measures and why it replaces traditional maturity for MBS duration
- How falling interest rates trigger contraction risk (principal returned early, forced reinvestment at lower rates)
- How rising interest rates trigger extension risk (principal returned late, locked into below-market yields)
- The distinction between Government National Mortgage Association (GNMA) explicit government guarantee and the implied guarantees of Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
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