Exhibit 5 (FI page 383), shows a simple sequential pay structure of $400 par, with 4 tranches. Each tranche coupon is 7.5%, with tranche A par amount = $194,500,000. Interest received by this whole structure is 0.075 * $400m /12 = $2.5m. Since tranche A makes up 48.625% of the whole structure ($194,500,000 / $400m), therefore it gets 0.48625 * $2,500,000 = $1,215,625, which is correctly shown in the schedule on next page. No problem here. But they show that tranche A gets a principle payment of $709,923, which I can’t see from where! The remaining interest payment ($2.5m - $1,215,624 = $1,284,375) gets distributed to the other tranches, and this is correctly shown on the schedule. So from where have they pulled the $709,923?
prepayments are based on 165PSA. So there is some overpayment happening - which is getting paid to the Sequential tranche A.
cp got there first.
I see, so based on the speed of 1.65, they received an additional $709,923, which gos to trance A only. But if there were no prepayments, would they just distribute interest only to the tranches? Wouldn’t that mean tranche A gets paid interest only, no principle payment in this case? Shouldn’t payments always split into principle+interest? That’s really another question, thanks for the first answer.
Computation of the 709923 is shown in Exhibit 4. 400Mill Prin, 8.125% WAC on Collateral, Month 1, but 4 Months seasoned. Mortgage Pmt=2975868 Interest = 2500000 (Paying 7.5% per month) SMM=0.00111 Prin=267535 Prepayment=0.00111(400Mill-267535)=442389 Total Prin Paid=442389+267535=709923
What I didn’t get from that exhibit is where the Mortgage Pmt=2975868 comes from?
Another question, do you take those exhibitions as projecting cash flows? I would think so, as actual prepayments may be entirely different! So, i I invest in one of those tranches, such a schedule would just tell me what I should expect in monthly cash flows, which over the coming months could be something like those projections. If not, then I guess the CMO would guarantee those cash lows as good as they can, which means they face some risk, unless they insure it, etc…is that correct?
PRIN=-400000000 N=357 I/Y=8.125/1000 CPT PMT 2975868
as regards your question - those are projections based on current conditions. Prepayments are always iffy - there is a very high probability that prepayment cash flows may not pan out as scheduled. So these are really projections, of best case scenario. How they cover it in the event the prepayments do not happen - is entirely not in scope… I do think they are assured that there will be extension on the CMO tranches - which means they get interest and principal for a longer time.
aha…it’s based on WAC not the passthrough rate! So, the CMO collects $2,975,868 from mortgages, keeps (8.125%-7.5%)/12*$400M = $208k for themselves, and pay the tranches $2.5m in interest. But something is missing… They collected $2,975,868, paid out $2,500,000, they still have $475,686, of which they kept only $208k…if my math is right, there is still money left!
That is the scheduled principal=475686-208000=267686 Prepayment=442K and odd – total Prin=709K and odd
Got it…thanks.