Mortgage-Backed Securities on the Menu — When Homeowners Control the Timer

Taco Tuesday #15

30 years. That is the number printed across the mortgage. 360 scheduled monthly payments, a predictable timeline. Or so it appears.

Somewhere between the homeowner's kitchen table and the investor's portfolio, the homeowner can change the clock. They can refinance, sell the house, make extra payments, or stay in that mortgage far longer than investors expected.

You may own the mortgage taco, but the homeowner controls the timer.

In this Taco Tuesday episode of the Unbearably Bullish Podcast, Donald Johns opens the Mortgage Taco Academy and walks through how mortgage-backed securities are built, why their cash flows are shaped by human behavior, and what to ask before you ever look at the yield.

In This Episode

• One house, one borrower, one mortgage: how loans become a mortgage pool and an MBS
• Mr. Wall Street Taco's four-button timer: scheduled payments, refinancing, home sales and default
• Prepayment risk: when your money comes home early
• Extension risk: when the taco gets extra large right as the market loses its appetite
• Credit vs. timing: will the money arrive, and how quickly?
• Not every recipe is the same: Ginnie Mae, Fannie Mae, Freddie Mac and private-label securities
• The Bull's case and 🐻 the Bear's case
• Five mortgage-backed securities myths
• Seven questions to ask before evaluating any mortgage-related investment
• This week's Taco Tuesday Challenge: two interest-rate scenarios

Chapters

Never inspect the coupon without inspecting the clock.

• Like the episode
• Bull or bear: are mortgage-backed securities a useful fixed-income ingredient, or does the homeowner-controlled timer make the recipe too hard to predict? Tell us in the comments