What Is Vintage?
Vintage is a popular term among mortgage-backed security (MBS) traders and investors, referring to an MBS that has been seasoned over a certain period. Typically, an MBS has a maturity of around 30 years. An MBS’s ‘vintage’ implies reduced exposure to prepayment and default risk, though this decreased risk also limits potential price appreciation.
Key Takeaways
- Vintage is a term used to describe mortgage-backed securities (MBS) that have been seasoned.
- These securities have been issued long enough and received sufficient on-time payments, thus lowering the risk of default.
- Vintage indicates the age of an item relative to its creation year, and it helps assess MBS risk levels.
- Two MBS with the same vintage might still have different risk levels and perceived values.
The Mechanics of Vintage in MBS
The underlying loans of vintage MBS exhibit unique characteristics, such as burnout, which contribute to these securities trading at premium prices. These characteristics arise from the pooling of underlying assets in MBS. Typically, MBS assets are aggregated across similar geographical regions and share common maturities and interest rates. This pooling method enhances predictability in forecasting payment plans.
MBS are predominantly issued by U.S. government-sponsored enterprises (GSEs). These investments comprise debt obligations associated with groups of residential property loans. The securities represent particular claims against the principal and interest payments owed by borrowers and are traded on the secondary market.
Understanding Vintage as It Applies to MBS
The term vintage denotes the age of an item based on the year it was created. For example, if an item was created in 2012, its vintage year is 2012, and its age is calculated by subtracting the vintage year from the current year.
Variability in the vintages of specific MBS can signify different risk levels for investors. For instance, the U.S. subprime mortgage crisis began in 2007 due to the issuance of a large number of high-risk mortgages between 2004 and 2007. Loans from these vintage years exhibited higher default rates and thus posed greater risks than loans from other periods.
Special Considerations for Evaluating Vintage in MBS
Though vintage is a crucial factor in evaluating an MBS’s inherent risk, other aspects also play significant roles. Consequently, two MBS with the same vintage may have varying levels of assumed risk, resulting in different perceived values. Other factors include the remaining value of the mortgage pool, the current market value of the properties backing the mortgages, and the accrued interest.
An MBS payout schedule differentiates it from many other investment vehicles. While bonds may pay semiannually, annually, or at an agreed-upon maturity date, an MBS provides monthly payouts to investors. These payments include both interest and portions of the principal, aligning with the traditional mortgage payment schedules. While bond payments typically consist only of earned interest until maturity, an MBS ensures monthly payments paralleling the mortgage debtor’s payment schedule.
Related Terms: Maturity, Default Rates, Payout Schedule, Investment Risk, Burnout.
References
- Financial Industry Regulatory Authority. “Mortgage-Backed Securities”.
