What is Original Face?
Original Face is the par value assigned to a Mortgage-Backed Security (MBS) at its issuance time. An MBS is an investment containing several home loans from various banks, allowing investors to earn income from these loans.
The Original Face represents the total principal amount originally owed on the mortgage loans, outlining the MBS’s initial worth. It is also known as the Original Face Value.
Although the Original Face Value gives investors an initial evaluation of the MBS, it does not indicate future value changes.
Key Highlights
- Original Face represents the total outstanding balance of an MBS at the time of issue.
- The outstanding balance, and thus the value, of the MBS declines over time as the underlying loans are repaid.
- Mortgage-backed securities with the same issue date and original face value can differ nowadays due to various loan repayment rates.
Understanding Original Face
Mortgage-backed securities (MBS) contain home loans sold by issuing banks to government-sponsored enterprises (GSE) or financial companies, consolidated into a single investable security. These MBSs return both principal and interest to holders through periodic payments, usually monthly.
The Original Face denotes the total outstanding balance at the MBS’s inception. Over time, this value decreases as borrowers make loan payments, leading to a lower actual value than the Original Face.
Securities can be tailored for specific needs. Institutional investors might request a certain face value and other characteristics, which issuers attempt to fulfill. As mortgages typically involve specific amounts, minor variances in targeted and actual face values may arise.
Original Face vs. Current Face
As borrowers make payments, the total outstanding balance of the MBS decreases, visible as the Current Face value.
The Original Face Value remains fixed while the Current Face Value evolves, often due to loan repayments or early payments.
Original Face and Pool Factor Explained
A Pool Factor measures how much of the original loan principal remains, calculable by dividing the current face by the original face value. Upon issue, an MBS has a pool factor of one, reducing over time as loans are repaid. When 50% of mortgages are paid down, the pool factor will be 0.50.
Investors analyze both the current face and forecasted pool factor to project income streams from the MBS. Early repayments, or prepayments, accelerate the pool factor reduction and, consequently, the MBS’s current face value.
Managing Mortgage Refinancing
When interest rates are low, homeowners may refinance mortgages, leading to higher prepayment rates of original loans within the MBS. This elevates the pool factor as the current face reduces faster, causing notable monthly average drops.
Interest Rate Risk is also critical for investors who may face lower overall returns when loans’ principals are repaid earlier than expected. Early repayments demand rapid reinvestment, often at lower yields than the initially purchased MBS.
Benefits of Understanding Original Face
Investors can determine their potential earnings from an MBS by referencing the original face value. Over time, this figure remains a crucial reference, aiding in the evaluation of the MBS’s return on investment (ROI).
Traders and investors utilize the original face value for modeling and valuing an MBS throughout its lifetime. By comparing the original face at inception to the current face value, they can assess the accuracy of initial valuation assumptions and understand ongoing prepayment risks.
