Description
A Mortgage-Backed Security represents an undivided ownership in an underlying pool of mortgage loans. The principal and interest cash flow from the mortgage loans, less servicing fees, is "passed through" to you on a pro-rata basis.
Unlike most fixed-income products, Mortgage - Backed Securities are sold and traded based on the average life of the security rather than the stated maturity. The average life is the average time it takes for mortgages in the underlying pool to be "paid off," based on certain assumptions about mortgage prepayment speeds. If prepayment speeds are faster than expected (typical in declining interest rate environments), the average life of the security will be shorter than the original estimate. If prepayment speeds are slower (typical in rising interest rate environments), the security's average life will be extended.
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Mortgage Pass - Through Securities