MBS monthly instalment (P+I) changes every month as it seasons?

[Xander086]

2013 CFA Mock AM Q15

For a mortgage loan, the monthly instalment (P+I) is fixed for the whole loan tenure so shouldn’t it be the same for a MBS? Or it changes every month as it seasons and we need to use TVM function to recalculate the MBS monthly instalment P+I every month? But why?

[CarloRoco]

because of prepayments. lowers principal

[bahgill]

I had the same problem with this OP, no one seems to give me a straight answer. Even the book was weird about it, said its based off a formula but doesnt go into it. We understand that the principal gets lowered, but on typical residential mortgages the monthly P&I stays the same no matter the prepays.

[S2000magician]

@bahgill

I had the same problem with this OP, no one seems to give me a straight answer. Even the book was weird about it, said its based off a formula but doesnt go into it. We understand that the principal gets lowered, but on typical residential mortgages the monthly P&I stays the same no matter the prepays.

The payments on the individual mortgages stay the same (generally), but for the MBS they can change. If one homeowner refinances his loan, or sells his house, then that loan drops out of the pool: lower payments to the MBS holders thereafter.

[bahgill]

Thanks S2000, so its just how MBS work is that they recalc the P&I every month. Makes sense, just felt funny since thats not what Im used to with my mortgage!

[S2000magician]

@bahgill

Thanks S2000

My pleasure.

@bahgill

so its just how MBS work is that they recalc the P&I every month. Makes sense, just felt funny since thats not what Im used to with my mortgage!

Yup.

[Xander086]

@S2000magician

@bahgill

I had the same problem with this OP, no one seems to give me a straight answer. Even the book was weird about it, said its based off a formula but doesnt go into it. We understand that the principal gets lowered, but on typical residential mortgages the monthly P&I stays the same no matter the prepays.

The payments on the individual mortgages stay the same (generally), but for the MBS they can change. If one homeowner refinances his loan, or sells his house, then that loan drops out of the pool: lower payments to the MBS holders thereafter.

thanks!!!

[S2000magician]

@Xander086

@S2000magician

@bahgill

I had the same problem with this OP, no one seems to give me a straight answer. Even the book was weird about it, said its based off a formula but doesnt go into it. We understand that the principal gets lowered, but on typical residential mortgages the monthly P&I stays the same no matter the prepays.

The payments on the individual mortgages stay the same (generally), but for the MBS they can change. If one homeowner refinances his loan, or sells his house, then that loan drops out of the pool: lower payments to the MBS holders thereafter.

thanks!!!

You’re welcome.