Definition
The Original Face refers to the total outstanding balance of a mortgage-backed security (MBS) at the time it is issued. It represents the initial principal amount on which future interest payments will be calculated.
Function and Mechanism
Calculation
Role in MBS
The Original Face serves as the basis for determining interest payments to investors. As the underlying mortgage loans are paid down over time, the outstanding principal balance decreases, which is referred to as the current face.
Types of Mortgage-Backed Securities
- Pass-Through MBS: Investors receive a proportional share of principal and interest payments from the mortgages in the pool.
- Collateralized Mortgage Obligations (CMOs): MBS that are structured into tranches, each with different levels of risk and reward.
Historical Context
Mortgage-backed securities emerged in the 1970s as a way to provide liquidity to the mortgage market. The concept of Original Face has been crucial in standardizing the value of these securities, making them more accessible to a broad range of investors.
Applicability and Benefits
Benefits for Investors
- Predictability: Provides a clear starting point for expected cash flows from the MBS.
- Valuation: Helps in the valuation and comparison of different MBS.
- Risk Assessment: Facilitates the analysis of prepayment and default risks associated with the underlying mortgage loans.
Application in Financial Markets
- Pricing: Used to price MBS in the secondary market.
- Portfolio Management: Essential for managing portfolios containing MBS, as it serves as a reference for performance measurement.
Comparisons and Related Terms
Related Terms
- Current Face: The remaining outstanding principal balance of an MBS after some of the principal has been paid off.
- Principal: The amount of the loan borrowed, not including interest.
- Amortization: The process of paying off debt with a fixed repayment schedule in regular installments over time.
FAQs
What happens to the Original Face as mortgages are paid down?
As mortgage payments are made, the total outstanding principal balance of the MBS decreases, thereby transitioning from the Original Face to the Current Face.
How does the Original Face affect interest payments?
Interest payments are calculated based on the Original Face but will reduce over time as the principal amount decreases with each payment.
Can the Original Face change after issuance?
No, the Original Face remains fixed after issuance; however, the Current Face changes as mortgage payments reduce the outstanding balance.
Summary
The Original Face is a fundamental concept in the world of mortgage-backed securities. It sets the stage for initial valuations, interest payments, and risk assessments of MBS. Understanding this term is crucial for investors and financial analysts involved in the mortgage and securitization markets.
By grasping the workings and implications of the Original Face, stakeholders can make informed decisions, ensuring effective risk management and optimized investment strategies in mortgage-backed securities.
