Concerning Fannie Mae-sponsored Mortgage Backed Securities (MBS): Identify which

Question

Concerning Fannie Mae-sponsored Mortgage Backed Securities (MBS): Identify which of the following statements is correct.

a) The coupon rate on pass-through MBS sold to investors is always higher than the average coupon on the individual mortgages making up the pool

b) The coupon rate on pass-through MBS sold to investors is always set equal to the average coupon on the individual mortgages making up the pool

c) The coupon rate on pass-through MBS sold to investors is always lower than the average coupon on the individual mortgages making up the pool

d) The coupon rate on pass-through MBS sold to investors is sometimes higher, sometimes equal to, and sometimes lower than the average coupon on the individual mortgages making up the pool

Explanation / Answer

The coupon rate on pass-through MBS sold to investors is always lower than the average coupon on the individual mortgages making up the pool in order to compensate for servicing fees and under writing fees.

MBS coupon rate + servicing fees + underwriting fees = average coupon on the individual mortgages in the pool.

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