This is a follow-up to my last post, Sequential Pay CMO. The purpose of this example spreadsheet is to show a simple example of how floating and inverse-floating rate securities can be produced from a fixed rate pool of mortgages. It is not the only way floating rate CMOs can be structured, but for example purposes, the simplest.
We start (sheet “Pool”) with a $10 million pool of fixed rate 30-year mortgages, packaged and guaranteed by a government agency. The WAC (weighted average coupon) is 6.50% with a 50 basis point servicing / guarantee fee, for a net coupon of 6.00%. The initial assumed prepayment assumption is 100 PSA. This can be changed later.
Both the floater and inverse-floater will have a pro rata collateral distribution. In other words, both will receive principal payments as a percent of the established distribution. The example distribution on sheet “Summary” is 75% for the floater and 25% for the inverse-floater. You only need to enter three yellow input cells to create both the floater and inverse-floater initial stucture:
- The percent of the pool that will make up the floater (example is 75%)
- The floater’s floor is (.25% in the example, the inverse-floater is set a zero)
- The current index (1-month LIBOR) initial rate (2.50% in the example)