U.s. Mortgage-backed Securities Pricing Study

Mortgage loans securitization is a kind of financing method. By using this method, the financial institutions or the special purpose vehicles reengineer the housing mortgage loans with low liquidity , issue mortgage-backed securities with fixed income whose principal and interest will be guaranteed to be repaid with the future cash flow of the housing mortgage loans, and provid the securities to the real estate consumers and the investors in the capital market. Mortgage loans securitization is a spotlight in the field of international financial innovations. China also wants to utilize this financial method. The Construction Bank of China issued the first domestic mortgage-backed security in the year of 2005, which meant that mortgage-backed securitization has come into being in China. Mortgage-backed securities can provide new credit fund resource for home mortgage loans, more people will have ability to buy houses. It can also propel the reformation of house regulations and foster new growth point. At the same time, it can shift the long-term credit assets to the securities which can be sold in the financial market. This can promote mobility of assets and can solve unmatched problem of banks' assets terms.Since mortgage loans securitization has played an important role in economy, it is necessary to study the most important problem -the pricing theory of mortgage-backed security. After thirty-years' development, the types of mortgage-backed securities have been diversified in America, and the pricing theories have become more and more perfect, which can give a reference for setting price on mortgage-backed securities in our country. Taking the America as an example, this paper firstly introduces the basis of pricing theory on mortgage-backed securities ,which has been called cash flow discount analysis. Considering the two main factors of the pricing method : the cash flow and discount rate, the author secondly studies the factors of the prepayment risk —the special risk on cash flow, and mainly describes how to predict the prepayment risk. Thirdly the author compares and summarizes four kinds of the pricing theory on mortgage-backed securities in America. According to the comparision of the different pricing theory on mortgage-backed securities of America, the author analyzes the main different factors of pricing conditions between America and China. Based on our actual situation, the thesis points out the most practical pricing theory on mortgage-backed securities in our country. At the end of this paper, the author gives some advices of improving pricing efficiency on mortgage-backed securities.