Author: James E. McNulty

Start Page: 45
End Page: 62
Volume: 2
Issue Number: 1
Year: 1999
Publication: Journal of Real Estate Practice and Education

Abstract: This article presents a different approach to teaching secondary mortgage market concepts. Focusing on prepayments allows the instructor to illustrate and reinforce a rich variety of concepts: risk-return tradeoffs and efficient markets, servicing risks, the use of econometric models in providing information to investors and the importance of duration concepts to mortgage investors. Reviewing the history of the development of mortgage derivatives also illustrates the process of financial engineering—as prepayment risk and other risks in holding fixed-rate mortgages were explicitly recognized, new mortgage-backed securities were created to manage these risks.