Chapter 3
Valuation of Mortgage-Backed Securities
The typical mortgage securitization process is presented in Exhibit 3.1. Arrow (1) corresponds to the fixed payments made by mortgagors to the bank, based on a 10 percent 30-year fixed-rate mortgage. The bank receives the mortgage payments, and even though it sold its mortgages to Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage Association (FNMA), or an investment bank, it retains a servicing fee, typically about 0.25 percent of the outstanding balance of the mortgage in the previous year. The servicing fee is compensation for the bank, which is still collecting the mortgage payments, taking care of payment delays, and, if necessary, foreclosing the property.
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