The percentage of the monthly cash flow that remains after the cash flow has been divided into a coupon and principal payment for the mortgage backed securities (MBS) holder. This servicing fee typically goes to the servicer of the loan, and is possibly a guarantee fee for the underwriter of the MBS. |||For example, in a typical MBS deal, if the interest rate on a mortgage is 8%, the MBS holder might receive 7.5%, the servicer of the mortgage receives 0.25% and the MBS underwriter gets 0.15%. This leaves the reamining 0.10% (8% - 7.5% - 0.25% - 0.15% = 0.10%) as excess servicing.Like an MBS, excess servicing is subject to prepayment and extension risk. When excess servicing is priced, it is valued based on an estimate of how long the annuity will last. This must be estimated since it cannot be known for certain when a mortgage borrower might refinance or otherwise pay-off his or her mortgage. The value of excess servicing can change dramatically when interest rates change, because changes in current interest rates relative to the interest rate on the mortgage determine how long the annuity of excess servicing associated with that mortgage might last.
One of the four types of compound options, this is a put option on another underlying put option. The buyer of a put on a put has the right but not the obligation to sell the underlying put option - also known as the vanilla option - on the expiration date. This type of option is used when leverage is desired, and the trader is moderately bullish on the underlying asset. The value of a put on a put changes in direct proportion to the price of the underlying asset, i.e. it increases as the asset price increases, and decreases as the asset price decreases. Also known as a split-fee option. A put on a put has two strike prices and two expiration dates, one for the initial compound put option and the other for the underlying vanilla put option. Note that compound options are generally European-style exercise, which means that they can only be exercised on the expiration date. Since one of the variables that determines the cost of an option is the price of the underlying asset, the cost of a put on a put option will generally be lower than the cost of a put on the corresponding asset. It can therefore provide a great deal of leverage to the options trader.
A company engaged in the business of originating and/or funding mortgages for residential or commercial property. A mortgage company is often just the originator of a mortgage; they market themselves to potential borrowers and seek funding from one of several client financial institutions that provide the capital for the mortgage itself. |||Many mortgage companies went bankrupt during the subprime mortgage crisis of 2007-2008. Because they weren’t funding most of the loans, they had few company assets, and when the housing markets dried up, their cash flows quickly evaporated. Some mortgage companies do offer turnkey mortgage services, including the origination, funding and servicing of mortgages. The factors that differentiate one mortgage company from another include relationships with funding banks, products offered and internal underwriting standards.
A bond secured by a mortgage on one or more assets. These bonds are typically backed by real estate holdings and/or real property such as equipment. In a default situation, mortgage bondholders have a claim to the underlying property and could sell it off to compensate for the default. |||Mortgage bonds offer the investor a great deal of protection in that the principal is secured by a valuable asset that could theoretically be sold off to cover the debt. However, because of this inherent safety, the average mortgage bond tends to yield a lower rate of return than traditional corporate bonds that are backed only by the corporation's promise and ability to pay.
A day on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire. This is similar to the triple witching hour, except that the quadruple witching hour sees also the expiry of SSFs. Quadruple witching days occur on the third Friday of March, June, September and December.
A process used in the settlement of mortgage-backed security to-be-announced (TBA) trades. This process requires that the sell side of a TBA trade inform the its buy-side counterpart of the exact securities that will be delivered into the trade by no later than 3 pm EST, and 48 hours prior to the established trade settlement date. In addition, each trade must be broken down into $1 million lots, and each lot can contain no more than three pools. A 0.01% variance is allowed on each $1 million lot. Most participants in the TBA market have software that helps them with mortgage allocations. |||As the TBA market developed in the 1980s and 1990s, mortgage allocations were done manually or with limited software. The day 48 hours prior to major settlement days, known as "48 hour day", was a hectic and stressful day for Tbasecurities dealers and other market participants. The allowed variance on TBA trades was initially much higher than the 0.01% it is today, and traders used this "allocation option" to make arbitrage profits. For example, if the current market price of a TBA trade was higher than the actual trade price, a trader could use the allowable variance to deliver a minimum amount into the trade, sell the difference at the current market price and realize the difference in prices on the dollar amount of the allowable variance as profit. The exact opposite could be done if the trade price was higher than the current market price; the trader would deliver as much as allowed by the variance into the actual trade and purchase the difference in the current market at a lower price. The reduction in the allowed variance to 0.01% and the advent of sophisticated software has made mortgage allocation much less hectic than it once was.
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.The possible payoff for a holder of a put option contract is illustrated by the following diagram: When an investor purchases a put, he or she expects the underlying asset will decline in price. The investor will then profit by either selling the put options at a profit, or by exercising the option. If an investor writes a put contract, he or she is estimating the stock will not decline below the exercise price, and will not fall significantly below the exercise price.Consider if an investor purchased one put option contract for 100 shares of ABC Co. for $1, or $100 ($1*100). The exercise price of the shares is $10 and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10.If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option position by selling the contract on the open market. On the other hand, he can purchase 100 shares of ABC at the existing market price of $8, then exercise his contract to sell the shares for $10. Excluding commissions, the total profit for this position would be $100 [100*($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a "married put" position and serves as a hedge against a decline in share price.
A type of revenue bond issued by a municipality or similar government body. A moral obligation bond not only gives investors the tax exemption benefits inherent in a municipal bond, but also provides an additional moral pledge of commitment against default. The issuing body's commitment is supported by a reserve fund established to meet any debt service costs the government may be unable to make. |||It is important to note that with a moral obligation bond, the additional security provided by the government is only morally - and not legally - binding. However, the pledge is generally regarded as being as credible as a legally binding promise because the issuing government would face negative credit rating effects if it failed to honor the pledge.
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