Mortgage duration

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Mortgage duration

A modification of standard duration to account for the impact on duration of MBSs of changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that reflects the impact of changes in prepayment speed or price.

Mortgage Duration

The number of years until an investor receives the present value of all income from a mortgage-backed security (including interest and principal). It is used to gauge a mortgage-backed security's sensitivity to interest rate changes. The longer a mortgage duration is, the more an MBS declines in value when interest rates rise, and the more it rises when they fall.
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Such a policy could be implemented with caps on elements such as loan-to-value ratios, loan-to-income ratios, and mortgage durations, or imposing ceilings on the amount banks are permitted to lend, should prices exceed a given limit.
In this environment, as mortgage durations shortened the company increased its volumes of short-term debt--and raised its percentage of option-based debt, including interest rate caps--to maintain a close duration match on its mortgage portfolio.
Howard said that the company expects that as interest rates stabilize or rise, and liquidating mortgages are replaced with current-coupon loans, mortgage durations will lengthen and the company will pay down much of its short-term debt.
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