Agency Securities
Chapters in this video
- 0:00 Ginnie Mae versus Fannie Mae and Freddie Mac
- 2:32 MBS pass-through mechanics and monthly payments
- 3:38 Prepayment risk when rates fall
- 4:27 Extension risk when rates rise
- 5:23 Asset-backed securities (ABS) with non-mortgage collateral
- 5:57 CMO tranches and the tower of cups
- 7:31 Why companion tranches absorb all the risk
- 9:10 Rapid-fire exam recap
What this video covers
- Why only Ginnie Mae (GNMA), and not Fannie Mae or Freddie Mac, carries the explicit full faith and credit backing of the U.S. government
- The difference between government corporations and government-sponsored enterprises (GSEs), and why that distinction is a favorite exam trap
- How mortgage-backed securities (MBS) use pass-through certificates to deliver principal and interest monthly (12 times per year, not semiannually)
- Why prepayment risk hits investors when interest rates fall, and why extension risk hits when rates rise
- What asset-backed securities (ABS) are, and how they replicate MBS mechanics with non-mortgage collateral such as auto loans and credit card receivables
- How collateralized mortgage obligations (CMOs) slice cash flows into tranches, and why companion tranches absorb prepayment and extension risk to protect PAC tranches
- Why CMOs do not eliminate prepayment or extension risk, but merely redistribute it
Read the full lesson, free
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