503-785-3485
bill@conerlyconsulting.com
  • Facebook
  • Twitter
  • Linkedin
Conerly Consulting Conerly Consulting
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Home
  • Investments
  • Understanding Mortage Securities

Investments

20 Apr 2007

Understanding Mortage Securities

  • By Bill Conerly
  • In Investments
  • 1 comment

With all the talk about mortgages, lots of folks don’t understand what really happens behind the scenes after a mortgage is made.  Calculated Risk has two primers on the mortgage securities market, but first I’m going to lay the scene with real basic stuff.  Links below.  Note: if you received an MBA in finance from Wharton last year, you’ll find this terribly basic.

First you need to understand the basics of stripping.  (not pole dancing, but tearing coupons off of bonds.)  Let’s say you have a two year Treasury bond.  It pays interest twice a year (by convention), plus principle is repaid upon maturity.  So you really have four payments coming:  interest in six months, interest in 12 months, interest in 18 months, and principle plus interest in 24 months.  You can take the bond and strip it into its four parts, and sell each one individually.  That way, even though the treasury does not sell 18-month zero coupon bonds, a person can buy such a thing through a stripper.

Why would would an investor want just parts of a bond?  It’s easier to imagine with a 30-year bond.  A life insurance company is paid a premium today, but knows that some of the money it will eventually pay out won’t be needed for 20 to 30 years.  That company buys the payments that will arrive in 20 to 30 years.  Why don’t they buy the whole bond?  They don’t want interest income next year; they would just have to worry about getting it re-invested.  (to the MBAs reading this:  I know, this story is being terribly simplified.  Go read something else.)  Who wants the earlier payments?  A medical malpractice insurance company might figure that it won’t need its money for 7 to 10 years; a car insurance company might want money back in 6 to 12 months.  Different investors have different needs.  And those who are flexible in their needs pick up the odds and ends that nobody else wants, getting a tiny premium for doing so.

With mortgages, the same applies, but there’s a problem:  some borrowers prepay.  And it’s not easy to know exactly when that will happen.

With this background, you’re ready for Calculated Risk two articles:  here and here.

  • Share:
Bill Conerly

    Comments

  1. Watson
    February 19, 2009

    The US mortgage-backed securities market is the largest fixed income market in the world, with over $8 trillion outstanding followed by US treasury market with around $5 trillion outstanding.
    ==================================
    Watson
    Home Loans

Comments are closed.

Search

Sign Up For Our Newsletter!

View Latest Issue

RSS Bill’s Forbes Articles

  • Inflation Has Not Shown Up Yet, But It’s Coming February 25, 2021
    Inflation is muted, but not for long. Inflation is coming in the next two years, then will be followed by a boom/bust business cycle, or maybe two.

Testimonials

The ratings you received from our banker evaluations were among the highest I’ve seen, which matched my impressions exactly. Your presentation style is quite engaging, you bring interesting and valuable content, and our ability to interact in a stimulating way during “Q&A” sessions makes you a valuable addition to any meeting agenda. As a bonus, you are a genuinely enjoyable participant in conference activities beyond your presentation.
Steve Yeakel, Montana Independent Bankers
Bill Conerly is one of the most interesting and engaging speakers I have ever heard. The fact that he is a very funny man is a bonus.
James A. Kronenberg, Oregon Medical Association
Dr. Conerly’s presentation and view of the economic conditions impacting the world of business is insightful and thought-provoking. His analysis and presentation style is audience focused and engaging, leading to the efficient development of follow-up activities by those in attendance.
Paul Ulrich, The Inteplast Group (plastic bags)
You made a complicated global picture understandable. I have received many favorable comments from those in attendance. I frequently heard comments like ‘Now I understand’ or ‘Wow, now I get it’ and ‘He was great to listen to. Thanks for bringing Bill to our meeting.’
Pete Van Sickle, Idaho Department of Lands
It can be difficult to find economists who provide good substantive information who are also entertaining and engaging. I received many enthusiastic comments about Dr. Conerly from members and others in the audience.
Molly Steckel, Idaho Telecom Alliance
Bill is a delight and easy to work with. The client thought he was great and delivered value to their group. I would definitely recommend Bill.
Andrea Gold, Gold Stars Speakers Bureau
Bill did a great job! There were many in the audience who liked him and many in the audience who loved him! Bill shared pertinent and timely information with our audience of commercial real estate professionals and added interesting stories and a funny sense of humor twist.
Jana Knoll, BOMA Boise
AgFirst Farm Credit Bank has benefitted from Bill Conerly’s unique insights and perspectives several times over the past five years…his materials consistently cover the points that we agree on…he has been very well-received by our groups, and we look forward to having Bill with us again in the future.
Ronnie Hucks, AgFirst Farm Credit, Columbia
Bill assisted O.B. Williams Company with developing a strong business plan that we implemented 18 months ago. As a result and together with Bill, we are improving our position within our highly competitive market segment.
David Wick, CEO, O.B. Williams Company (wood products)
Seems no matter where I go, I hear you talking – and always doing a great job with different material well tailored to the audience. Very impressive!
Alan Shiffer, World Vision

Get in touch

(503) 785-3485

bill@conerlyconsulting.com

PO Box 2188
Lake Oswego, OR 97035

Useful Links

  • Consulting
  • Speaking
  • Videos
  • Blog
  • Press
  • Contact

Social Links

  • Facebook
  • Twitter
  • Linkedin

Newsletters

Copyright 2020 Conerly Consulting LLC