Mortgages and Mortgage-backed Securities (FRM Part 1 2023 – Book 3 – Chapter 18)

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After completing this reading, you should be able to:
Describe the various types of residential mortgage products.
Calculate a fixed-rate mortgage payment and its principal and interest components.
Describe the mortgage prepayment option and the factors that influence prepayments.
Summarize the securitization process of mortgage-backed securities (MBS), particularly the formation of mortgage pools, including specific pools and to-be-announceds (TBAs).
Calculate the weighted average coupon, weighted average maturity, single monthly mortality rate (SMM), and conditional prepayment rate (CPR) for a mortgage pool.
Describe the process of trading pass-through agency MBS.
Explain the mechanics of different types of agency MBS products, including collateralized mortgage obligations (CMOs), interest-only securities (IOs), and principal-only securities (POs).
Describe a dollar roll transaction and how to value a dollar roll.
Explain prepayment modeling and its four components: refinancing, turnover, defaults, and curtailments.
Describe the steps in valuing an MBS using Monte Carlo simulation.
Define Option Adjusted Spread (OAS) and explain its challenges and its uses.