When is the final maturity on a mortgage security not really the final maturity? Well, it depends.
Recently, I talked with a community banker who had a question about the Bloomberg yield tables. She said that she was looking at a mortgage-backed security and noticed that the maturity date shown at the top of the yield table wasn’t matching up with information in the “principal window” section at the bottom of each yield table scenario. She wondered why that would happen.
Different Final Maturities on the Yield Table
If you look at the Bloomberg yield table below, you’ll notice that the MBS pool’s final maturity doesn’t match up with the projected final maturity at the bottom of the yield table, even if the prepayment speed is 0 CPR (in other words, no prepayment):
At the top of the yield table, you will see the final maturity date for the mortgage security. In the example above, you’ll see it has a final maturity in November 2028.
The other maturity dates are near the bottom of the yield table in each of the what-if scenarios, near the average life and duration data. This section is called the principal window, and it shows the date period when an investor could expect to receive principal payments from their investment, given the assumed prepayment speed.
Typically, as the prepayment speed changes, the dates in the principal window can adjust. For example, if we had a mortgage security that began to prepay more quickly, the final month in the principal window could be earlier than a scenario with a slow prepayment.
However, if you look at the final maturity dates, you will notice that the latest ending date in the principal windows is always several months earlier than the final maturity date on the pool. In the example above, it happens in February 2027.
It does not matter what prepayment speed we use – the principal window never extends to match the final maturity date. So what is going on?
Why the Final Maturity Can Vary
Here is what is happening. The maturity date at the top of the yield table represents the final contractual maturity for the mortgage-backed security based on the loans in the mortgage pool when the investment was initially created.
The date is based on the latest final maturity date from all the loans contained in the security. More importantly, once this date is set, it will never change.
On the other hand, the dates shown in the principal window only consider the remaining loans in the pool. As the loans with longer final maturities pay off, the principal window adjusts to reflect the new current longest final maturity date.
Unlike the final maturity date at the top of the yield table, the principal window dates get updated, creating a date mismatch.
If you’re evaluating mortgage pass-through securities using the Bloomberg yield table, it’s a good idea to check the final maturity against the latest maturity in the principal window section. You may find that the mortgage pool is a little shorter than the final maturity would indicate because of loan prepayments. It may not be a huge difference, but it will give you a more accurate indication of what you can expect as an investor.
By the way, I’ve created a free guide that will help you navigate your way around the Bloomberg yield tables. It’s called “Understanding the Bloomberg Yield Tables” and provides an overview of all the info in the yield tables and the differences between the different yield table types. If you’re interested, you can download the guide here.