Key takeaways
– Original face (or original face value) is the par value of a mortgage‑backed security (MBS) at issuance: the total principal outstanding on the pool of mortgages when the security is created. (Source: Investopedia)
– Current face is the remaining principal outstanding after borrowers make scheduled payments and prepayments. The pool factor = current face / original face.
– Monitoring original face vs. current face and projecting the pool factor are essential for assessing cash‑flow timing, prepayment risk, reinvestment risk, and valuation of MBS.
– Investors should use prospectus/trust reports, prepayment models (CPR/PSA), and stress tests to build realistic cash‑flow and return scenarios and to manage interest‑rate and reinvestment risk.
What is original face?
– Definition: The original face is the total principal amount of all mortgage loans in an MBS at the time the security is issued. It is a fixed reference number that does not change over time. (Source: Investopedia)
– Practical role: It tells investors how large the underlying loan pool was at inception and is the denominator for key metrics (e.g., pool factor, percentage repaid).
Original face vs. current face
– Current face (remaining principal): The outstanding principal after borrowers have made scheduled principal payments and any unscheduled principal returns from prepayments or principal losses.
– Pool factor: Pool factor = current face / original face. A newly issued pool has a pool factor of 1.00. As principal is repaid, the pool factor declines toward zero.
– Example: Original face = $100 million. If $15 million of principal has been repaid, current face = $85 million and pool factor = 0.85.
Why original face matters
– Benchmarking and valuation: Original face provides the baseline for measuring actual paydown versus assumptions used at issuance. Comparing current face to original face reveals whether prepayments are faster or slower than expected, which affects yield and valuation.
– Cash‑flow predictability: Faster-than-expected prepayments return principal early and shorten the life of the security, reducing future interest income and creating reinvestment risk.
– Performance diagnostics: Tracking original vs. current face helps identify model errors (e.g., incorrect prepayment assumptions) and can drive trading or hedging decisions.
How prepayments and refinancing affect the pool factor
– When interest rates fall, refinancing typically increases, accelerating principal paydown and reducing the pool factor faster than expected. That shortens the MBS’s effective duration and lowers the expected total interest an investor will receive.
– Conversely, delinquencies or payment holidays can temporarily slow paydown (but may introduce credit or extension risk), also changing the pool factor dynamics.
Practical calculations and formulas
– Pool factor = current face / original face
– Current face = original face − cumulative principal repaid (scheduled amortization + unscheduled prepayments)
– If you know pool factor: current face = original face × pool factor
Illustrative numeric example
– Original face = $50,000,000
– After 12 months, cumulative principal repaid = $6,000,000
– Current face = $50,000,000 − $6,000,000 = $44,000,000
– Pool factor = $44,000,000 / $50,000,000 = 0.88
Important—prepayment metrics commonly used
– CPR (Constant Prepayment Rate): Annualized percentage of the remaining principal that is expected to prepay in a year.
– SMM (Single Monthly Mortality): The monthly equivalent of CPR.
– PSA standard: A convention to express prepayment speed (100% PSA is a common baseline ramp that reaches roughly 6% CPR after 30 months). Use PSA/CPR assumptions to model alternative prepayment scenarios.
Practical steps for investors (actionable checklist)
1. Identify the original face and related identifiers
• Find the MBS prospectus, pool supplement, or trust reports (look up CUSIP, pool number). The prospectus will state the original face at issuance. (Source documents: issuer prospectus/trust monthly reports)
2. Obtain current face and pool factor data regularly
• Use monthly remittance statements, trustee reports, Bloomberg/ICE data feeds, or custodial reports to get current face and pool factor.
3. Model cash flows under multiple prepayment scenarios
• Build base, fast, and slow prepayment cases using CPR/PSA assumptions. Translate to SMM to generate monthly principal repayment schedules and resultant interest receipts.
4. Calculate expected yield and sensitivity
• Compute yield-to-worst and expected cash yields for each scenario. Measure duration and convexity under different prepayment speeds.
5. Assess reinvestment and extension risk
• If prepayments accelerate, plan for reinvestment at prevailing market rates. If prepayments slow, consider extension risk (longer duration than expected). Quantify the portfolio impact.
6. Perform stress tests
• Stress interest rates, home‑price scenarios, and borrower behavior (e.g., spikes in refinancing or forbearance) to see how pool factor and cash flows change.
7. Use hedging and portfolio construction tools
• Consider hedges (interest‑rate swaps, Treasury futures) or tranche exposure (CMOs) to manage duration and prepayment sensitivity. Diversify across pools, vintages, and coupon structures to reduce idiosyncratic prepayment risk.
8. Reconcile assumptions to actuals
• Regularly compare modeled prepayment assumptions to realized pool factors. Update models and trading/hedging strategies as needed.
9. Document and communicate
• Keep clear records of original face, initial assumptions, updates, and performance reconciliations for audit and decision purposes.
Benefits and limitations of using original face
– Benefits:
• Provides a stable baseline for monitoring MBS paydown and prepayment behavior.
• Enables calculation of pool factor and comparison of actual vs. assumed prepayment rates.
• Useful for valuation, performance attribution, and regulatory reporting.
– Limitations:
• Original face is a historical figure only; it does not show current market value or credit quality.
• It must be used in conjunction with current face, prepayment metrics, interest‑rate forecasts, and credit/default assessments to form an investment view.
Managing the key risks tied to original face dynamics
– Reinvestment risk (from faster prepayments): Prepare reinvestment plans, use hedges that benefit from falling or rising rates, or ladder allocations.
– Interest‑rate risk (from expected vs. realized duration changes): Use duration hedges (swaps, futures) or trade into different tranche structures (e.g., CMOs that allocate prepayment sensitivity).
– Model/assumption risk: Regularly backtest models versus actual pool behavior and adjust assumptions for seasonality, borrower characteristics, and macro drivers.
Where to find authoritative data and further reading
– MBS prospectus, trust monthly remittance statements, and investor reports (primary sources for original face and pool factor).
– Investopedia — “Original Face” (primary source used here):
– Other useful resources: issuer websites (Ginnie Mae, Fannie Mae, Freddie Mac) for MBS documentation and prepayment statistics; market data vendors (Bloomberg, ICE Data) for live pool factors and analytics.
Summary
Original face is the fixed par amount of principal in an MBS at issuance and is the starting point for measuring paydown through the pool factor. It is indispensable for modeling cash flows, diagnosing prepayment behavior, and evaluating MBS valuations and reinvestment exposure. Investors should combine original face with current face, pool factors, prepayment models (CPR/PSA), and interest‑rate scenarios to make informed allocation, hedging, and portfolio management decisions.
Sources
– Investopedia — Original Face:
– Issuer prospectuses, trust monthly reports, and market data vendors (for pool‑specific original face and current face figures).