A bank plans to combine and securitize these two pools of conforming residential mortgages with the following characteristics.
Pool 1 Pool 2
N Loans 10 10
Loan Amount $100,000 $100,000
Mortgage Type CPM, monthly CAM, monthly
Interest 8% 7.75%
Maturity (Months) 360 300
1. What are the stated maturity, WAC, WAM, and WAL of each pool and the combined pool?
2. Explain differences between the two pools’ WAM and WAL. How do the combined pool’s WAC, WAM, and WAL relate to the individual pools’ characteristics?
3. If the combined pool is used to collateralize a mortgage pass-through (MPT) security, what average interest rate will the MPT investors receive assuming a servicing fee of 25 bps and a GSE guarantee fee of 25 bps?
4. Assuming no prepayments, compute the MPT cash flows and price the security at issuance if the investors’ required rate of return is 7%. How much profit will the bank earn?