What Is Vintage?
Let me explain what vintage means in the world of mortgage-backed securities. As an MBS trader or investor, you'll hear the term 'vintage' thrown around as slang for an MBS that's been around for a while—seasoned, if you will. These securities usually mature over about 30 years, and the vintage aspect means you're exposed to less prepayment and default risk. That said, this lower risk comes at a cost: it caps how much the price can appreciate.
Key Takeaways on Vintage
Vintage is essentially a casual way to talk about mortgage-backed securities that have matured enough through consistent, on-time payments, which lowers the chance of default. Think of it as the age of the MBS based on the year it was created—it's a straightforward metric for gauging built-in risk. Keep in mind, though, that even two MBS from the same vintage year might carry different risk levels and thus different values in the eyes of investors.
How Vintage Works
When you dive into how vintage operates, you'll see that certain vintage MBS have underlying loans with traits like burnout, which can make them trade at a premium. This stems from how the assets in MBS are bundled—typically grouped by geography, with similar maturity terms and interest rates, making payment predictions more reliable.
MBS themselves are investment options mostly issued by U.S. government-sponsored enterprises. They're made up of debt from bunches of mortgage loans, mainly on residential properties. Once created, the security gives you a claim on the principal and interest payments from borrowers, and these trade on the secondary market.
Vintage as Applied to MBS
Applying vintage to MBS is simple: it's about the item's age tied to its creation year. For instance, if something was made in 2012, that's its vintage, and you calculate its age by subtracting that from the current year.
Different vintages can signal varying risks to you as an investor. Take the U.S. subprime mortgage crisis starting in 2007—lenders pumped out high-risk loans from 2004 to 2007, so those vintages had sky-high default rates, making them riskier than ones from before or after.
Special Considerations
Vintage is just one piece of the puzzle for evaluating MBS risk; other elements come into play too. That's why two MBS from the same vintage might have different assumed risks and values—factors like the leftover mortgage pool value, current property market values, and accrued interest all matter.
One thing that sets MBS apart is their payout schedule. Unlike bonds that might pay semi-annually, annually, or in a lump at maturity, MBS dish out monthly payments to you, including both interest and a slice of principal. This mirrors the monthly payments borrowers make on their mortgages.
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