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Original face refers to the initial value of a mortgage-backed security, which remains constant even as the value decreases due to mortgage payments. Investors expect a set financial return, but missed payments can result in lower returns. Mortgage-backed securities are a common investment vehicle, but investors diversify to limit risk.
Original face is a financial term that relates to the original value of a mortgage-backed security. For example, a bank bundles several mortgages into a package for sale to an investor. The face value (original face) of this security is $700,000 United States Dollars (USD). As homeowners make payments against these mortgages, the value will decrease, although the face value is always $700,000 USD. The original value of the mortgage-backed security is important as it represents the historical value to the investor and is used to determine the return on investment.
Mortgage-backed securities are a common investment vehicle, although the term has somewhat deteriorated with the economic downturn that affected many nations from 2007 to 2010. Financial services companies will create these investments by bundling a wide variety of mortgages into a single investment. This is a new way of selling mortgages. Historically, banks and lenders would sell individual mortgages in a secondary market. Businesses can avoid this lengthy process by creating an original mortgage-backed security. This allows banks and lenders to pool the good loans with the bad, relieving their books of both mortgages.
The original face of the mortgage-backed securities will be reduced by the payments received each year from the borrowers listed on each mortgage in the security investment. For example, the $700,000 mortgage-backed collateral might include five people with mortgages worth $140,000 each. An investor who buys the mortgage-backed security essentially loans money to these homeowners. As owners make their monthly payments, investors will deduct the payments from the original face. Annual payments of $12,000 will result in a total of $60,000 deducted from the face value of the $700,000 mortgage-backed collateral.
Investors expect to earn a set financial amount when they invest in mortgage-backed securities. Because the original face is the amount paid for the investment, missed mortgage payments can result in lower financial returns on the investment. For example, each year the investor expects payments of $60,000 USD on his mortgage-backed collateral. However, if the investor only receives $55,000 during the year, he must try to collect the additional $5,000 or lose this money forever. If the money is bad, the investor must write this off as a loss against his overall investment gains or losses.
Many investment groups will have a large portfolio of money that they can spend on investments. The original value of mortgage-backed securities is important because investors will limit how much they buy in this security. To diversify risk, investors will buy other securities among different investment types.
Smart Asset.
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