Mortgage-Backed Securities (MBS) - Pass-Through Mechanics

What this video covers

• Why MBS pay monthly rather than semiannually, and how that frequency flows from the underlying mortgage structure
• How the pass-through rate is always lower than the mortgage rate because servicing and guarantee fees are deducted first
• What prepayment risk actually means: a timing problem (when you get paid), not a default problem (whether you get paid)
• Why falling interest rates trigger contraction risk (refinancing surges, principal returned early, reinvestment at lower rates)
• Why rising interest rates trigger extension risk (borrowers hold low-rate mortgages, principal returned late, locked into below-market yields)
• Why weighted average life (WAL) replaces traditional maturity for MBS, and why stated maturity is unreliable
• The credit-risk hierarchy: Government National Mortgage Association (GNMA) carries a full U.S. government guarantee, while Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) only carry an implied guarantee as government-sponsored enterprises (GSEs)