Mortgage Backed Securities
Overview
A mortgage backed security is one in which the cash flows from the security are generated by a pool of
mortgages. Typically, when a set of mortgages are pooled, there are several securities created from
the pool. Each security may be equivalent to every other security, or it may be that certain securities
are designed to receive principal payments before other securities, thereby transferring the risk
and making them safer.
Common Principal Allocations
- Sequential - all principal is paid to a single bond first, then it is allocated to the next bond in turn.
- Pro rata - principal payments are allocated to all bonds on a pro rata basis
- Priority - priority is given to certain bonds. Payments are directed in order to maintain a pre-defined
schedule.
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Modeling
Modeling
