Original Face
What Is Original Face?
Original face is the par value of a mortgage-backed security (MBS) at the time it is issued. A MBS is an investment that contains a number of mortgage home loans from different banks in which investors earn income from those loans.
The original face is the total principal amount originally owed on all of the mortgage loans and addresses how much the MBS is initially worth. Original face is additionally alluded to as original face value.
The mortgage-backed security's original face value is useful since it tells investors the initial total of each of the loans inside the MBS. Nonetheless, the original face value doesn't furnish investors with the value of the MBS later on.
Figuring out Original Face
Mortgage-backed securities (MBSs) are home loans that are sold by their issuing banks to a government-sponsored enterprise (GSE) or financial company and afterward packaged together into a single investable security. Dissimilar to most different types of bonds, mortgage-backed securities return both principal and interest to the holder in periodic payments, normally consistently.
At the point when a MBS is initially structured, the par value given to the pool is called the original face — the total outstanding balance at the hour of its commencement. Over the long haul, this balance is reduced as borrowers make payments on their loans, bringing about a lower genuine value of the MBS versus the original face value.
A MBS can be tailored for a specific need. For example, if a institutional investor asked for a particular face value notwithstanding different qualities, the issuer would give a valiant effort to match that request.
Since mortgages don't generally come in handily adjusted numbers, particularly when investors are searching for a particular borrower profile, the targeted original face and the real original face will probably be a bit unique. This is alluded to as variance. Generally, the variance is genuinely negligible, for example, a $1 million MBS coming in with a $1,010,000 original face.
Original Face versus Current Face
When borrowers start to make payments, the total outstanding balance owed on the MBS diminishes, and this value is alluded to as the current face value.
While the original face value stays fixed since it addresses the initial value of the total loans outstanding inside the MBS, the current face value changes after some time. The mortgage-backed security's current face value is, in part, driven by borrowers making loan payments or paying off their loans early.
Original Face and Pool Factor
The pool factor is a measure of the amount of the original loan principal remains and can be calculated by taking the current face and partitioning it by the original face value. A recently issued MBS will have a pool factor of one at beginning, meaning the original face will rise to the current face. On the off chance that half of the mortgages have been paid down, the MBS would have a 0.50 pool factor.
Investors monitor both the current face and the guage pool factor of a MBS to decide the consistency of the income stream from the security. Loans that are being paid down right on time — called prepayments — can accelerate the pool factor and reduce the current face value. Alternately, borrowers who are behind on their payments additionally impact the pool factor and the current face value.
Mortgage-backed securities start life with an original face value and a pool factor of one, which pushes toward no after some time as payments are made on the underlying mortgages.
Mortgage Refinancing
When interest rates are low, and it becomes less expensive to borrow, homeowners are boosted to refinance their mortgages, bringing about higher levels of prepayment of the original loans inside the MBS. This increase will show in the pool factor as the outstanding principal balance (current face) recoils quicker than in previous months, and the pool factor drops farther than its normal month to month average.
Interest Rate Risk
MBS investors generally don't have any desire to see the pool factor dropping quicker than arranged on the grounds that it brings about a lower overall return for them. At the point when a loan's principal is paid off right on time, future interest payments won't be paid on that part of the principal.
Speedier repayments because of mortgage refinancing additionally leave investors out of nowhere finding themselves with money they need to reinvest. Assuming it's a declining interest-rate environment, investors are left with lower-yielding assets that pay a lower return than the MBS they had initially purchased.
Benefits of Original Face
The original face gives investors the option to pick how much money they possibly need to earn from an investment. Later on down the line, the figure keeps on being counseled as a key reference point, empowering investors to lay out how a MBS is doing now compared to when it initially began — and decide its return on investment (ROI).
The original face is utilized by traders and investors in modeling and deciding valuations of a MBS over its lifetime. Recognizing the original face value of a MBS at its season of commencement and afterward comparing the value to the current face ought to give a thought of how solid those valuation presumptions were at the beginning.
Taking a gander at both original and current face values can uncover, for instance, whether the expected prepayment rate was accurate and in the event that the valuation is higher or lower than it ought to be considering the real prepayment risk until this point.
Features
- Original face is the total outstanding balance of a mortgage-backed security (MBS) at the time it is issued.
- Mortgage-backed securities with a similar issue date and original face can have different current values due to the changing pace of loan repayments.
- Over the long run, the outstanding balance declines as the underlying loans are repaid, bringing about a lower current value versus the original face value.
