Question

After origination of a mortgage-backed security, the WAM changes. What measures are used by Fannie Mae and Freddie Mac to describe the remaining term to maturity of the loans remaining in the loan pool?

Answer 1

Fannie Mae and Freddie Mac use two measures, the Average Life (AL) and the Final Maturity (FM), to describe the remaining term to maturity of the loans in a mortgage-backed security (MBS).

Step-by-step explanation:

When the weighted average maturity (WAM) of a mortgage-backed security (MBS) changes after origination, Fannie Mae and Freddie Mac use two measures to describe the remaining term to maturity of the loans remaining in the loan pool:

1. The Average Life (AL) is the average time it takes for the principal balance of the loans in the MBS to be repaid.
2. The Final Maturity (FM) is the date at which the last loan in the pool is expected to be fully repaid.

Both of these measures are used to assess the risk and expected cash flow of the MBS. They provide information about the remaining term and potential prepayment speed of the loans in the pool.