Question

Calculate the following items for a newly issued, $400 million outstanding balance mortgage pool that is comprised of 30-year mortgages. The pass-through rate is 7.5% and the WAC is 8.125%. Prepayment speed is 100 PSA.

a. Find the SMM for Month 1:

b. What is the scheduled monthly mortgage payment for Month 1 paid by homeowners? (hint: use your calculator's TVM buttons)

c. What is the interest payment to the MBS pass-through holders (overall) for Month 1?

d. What is the estimated principal prepayment for Month 1?

Answer 1

a. SMM = 1 - ((1-CPR)^(1/12))

CPR for PSA of 100 and 30 year mortgages is assumed to be 6%*30/30 or 6%. Hence SMM = 1 - ((1-0.06)^(1/12))

= 0.00514 or 0.514%

b. Scheduled monthly mortgage payment for Month 1 paid by homeowners is the total of Interest + Principal calculated on the mortgage amount of $400M and at the rate of WAC of 8.125%. Total payments can be calculated by using the excel formula of PMT, which is $2,969,988.72.

c. Interest payment to MBS holders (overall and without prepayment) is calculated using the pass through rate only:

7.5%/12*400,000,000 = $2,500,000.

d. Estimated Principal prepayment for Month 1 is SMM * (Total outstanding mortgage - Scheduled Principal payment for Month 1)

Scheduled Payment for the first month = $2,969,988.72, Principal payment for Month 1 = $261,655.39 (which can be derived using formula PPMT in excel). Hence Total amount available for Prepayment = Total bal - First Principal payment

or $400M - $0.261M = $399,738,344.61

Estimated Principal prepayment for Month 1 = 0.514% * $399,738,344.61 = $2,054,655.09