FMP 18. Mortgages and Mortgage-Backed Securities: LOs

a) Describe the various types of residential mortgage products.

b) Calculate a fixed-rate mortgage payment and its principal and interest components.

c) Describe the mortgage prepayment option and the factors that influence prepayments.

d) Summarize the securitization process of mortgage-backed securities (MBS), particularly the formation of mortgage pools, including specific pools and to-be-announceds (TBAs).

e) Calculate the weighted average coupon, weighted average maturity, single monthly mortality rate (SMM), and conditional prepayment rate (CPR) for a mortgage pool.

f) Describe the process of trading pass-through agency MBS.

g) Explain the mechanics of different types of agency MBS products, including collateralized mortgage obligations (CMOs), interest-only securities (IOs), and principal-only securities (POs).

h) Describe a dollar roll transaction and how to value a dollar roll.

i) Explain prepayment modeling and its four components: refinancing, turnover, defaults, and curtailments.

j) Describe the steps in valuing an MBS using Monte Carlo simulation.

k) Define Option Adjusted Spread (OAS) and explain its challenges and its uses.