Understanding Current Face Value of Mortgage-Backed Securities (MBS)

Current face – or current face value – refers to the face value of a mortgage-backed security (MBS)Mortgage-Backed Security (MBS)A Mortgage-backed Security (MBS) is a debt security that is collateralized by a mortgage or a collection of mortgages. An MBS is an asset-backed security that is traded on the secondary market, and that enables investors to profit from the mortgage business at a given point in time. Current face value is the same thing as current par value or current nominal value. It denotes the outstanding principal value of an MBS – the principal amount that remains to be paid out to investors, the purchasers of an MBS.

The importance of the current face value of a mortgage-backed security is that it provides the investors with a snapshot of how the security is faring, based on whether or not the repayment of the mortgage loans that comprise the security are being repaid as scheduled, ahead of schedule, or are lagging behind schedule. The latter instance indicates problems with mortgage loan collections that may deteriorate the value of the MBS.

Mortgage-backed securities in the United States contributed greatly to the 2008 Global Financial Crisis2008-2009 Global Financial CrisisThe Global Financial Crisis of 2008-2009 refers to the massive financial crisis the world faced from 2008 to 2009. The financial crisis took its toll on individuals and institutions around the globe, with millions of American being deeply impacted. Financial institutions started to sink, many were absorbed by larger entities, and the US Government was forced to offer bailouts when many mortgage loan borrowers began to default on their loan payments. The ultimate result was that the U.S. government ended up purchasing massive amounts of MBS that the creators or holders could not sell anywhere else. The government has since sold off many securities to investors but still holds a sizable number of MBS.

Summary

• Current face – or rather, current face value – refers to the face value of a mortgage-backed security (MBS) at a given point in time.
• The importance of the current face value of a mortgage-backed security is that it provides investors with an idea of how the security is doing, based on the repayment of the mortgage loans that comprise the MBS.
• Unlike the original par value of an MBS, the current face value declines as mortgage payments are received, and payments are made to investors.

Understanding Mortgage-Backed Securities

Mortgage-backed securities are single debt instruments that are composed of several combined debt instruments – namely, mortgage loans. Mortgage-backed securities are created when a bank or other mortgage lender bundles many mortgage loans that it has made into a single package, which is then sold to another financial entity. The loans are sold at a discount to their total principal plus interest value, thus enabling the buyer to hold or resell them for a potential profit.

The financial entity that purchases the package of mortgage loans then, in turn, creates a mortgage-backed security – a single debt instrument that investors can purchase just as they would a government or corporate bond. In the United States, the creators of an MBS are either a government-sponsored enterprise, such as the Federal National Mortgage Association or Fannie MaeFannie MaeThe Federal National Mortgage Association, typically known as Fannie Mae, is a United States government-sponsored entity that was established to expand the secondary mortgage market by making mortgages available to low and middle-income borrowers. It does not provide mortgages to borrowers, but purchases and guarantees mortgages, or a private financial company.

Investors in a mortgage-backed security receive periodic payments, much like the periodic coupon payments received by bond investors. The periodic payments received by investors represent the payments of mortgage loan principal amounts and interest made by the mortgage loan borrowers whose mortgage loans have been packaged into the MBS.

Like bonds, the term to maturity of an MBS varies. Typical maturity terms include five years, 15 years, and 30 years.

Formula for Calculating Current Face

Current Face = X * Y

Where:

• X = Original face value of an MBS
• Y = Principal balance factor

Original Face and Current Face

The original face value, or par value, of a mortgage-backed security is the sum of all the outstanding principal loan value amounts that make up the MBS. In contrast, current face value represents the outstanding principal amount at some point in the future, following the creation of the MBS. The principal amount declines as mortgage loan payments are made, and as portions of the principal and interest amounts received are paid out to investors in an MBS.

Payments to investors in an MBS are typically made monthly, just as the majority of home mortgage loan payments are made. Tracking the current face value provides investors with an easy means of monitoring how well their investment is doing.

Different mortgage-backed securities – even with identical original face values, interest rates, and maturity dates – may come with markedly different current face values, as the rate of home mortgage loan repayments will vary within each MBS. For example, if interest rates drop significantly, then many home mortgage borrowers may look to refinance their mortgage loans at a lower rate. If their original mortgage loans are contained within an MBS, then the total principal amount of those loans will be paid off ahead of schedule.

Current face value is calculated by multiplying the original face value of a mortgage-backed security by what is known as the principal balance factor or pool factor. The principal balance factor is the percentage of the original total principal amount of an MBS that remains to be repaid.

More Resources

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In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Coupon RateCoupon RateA coupon rate is the amount of annual interest income paid to a bondholder, based on the face value of the bond.
• PrincipalPrincipalPrincipal in bonds is their par value. It is the initial investment paid for a security or bond and does not include interest derived.
• Home MortgageHome MortgageA home mortgage is a loan provided by a lender – usually a bank, mortgage company, or other financial institution – to purchase a residence.
• Prime RatePrime RateThe term “prime rate” (also known as the prime lending rate or prime interest rate) refers to the interest rate that large commercial banks charge on loans and products held by their customers with the highest credit rating.