how vintage works
the underlying loans of certain vintage mbs have unique characteristics such as burnout that make the vintage trade at a premium price these unique characteristics are a result of how underlying assets in mbs are pooled mbs underlying assets are generally grouped across certain geographical regions with similar terms to maturity and interest rates this makes forecasting payment plans more predictable mbs are investment vehicles predominantly issued by a u s government sponsored enterprise gse the investments are comprised of the debt obligations associated with groups of mortgage loans predominantly residential property loans the security representing a particular claim against the principal and interest payments owed by borrowers is then issued by the creating entity mbs are traded on the secondary market 1vintage as applied to mbsthe term vintage relates to the age of an item as it relates to the year it was created if an item was created in 2012 then the vintage year is 2012 and its age can be determined by subtracting the vintage year from the current year the variation in the vintages of particular mbs may represent different levels of risk to investors with the u s subprime mortgage crisis that began in 2007 for example lenders had started originating large numbers of high risk mortgages from around 2004 to 2007 loans from those vintage years displayed higher default rates and were therefore riskier than loans made before and after special considerationswhile the vintage may be one factor used to determine the inherent risk of a certain mbs other factors are also considered in this case two mbs with the same vintage may have different levels of assumed risk and therefore may have different perceived values some additional factors include the remaining value of the mortgage pool the current market value of the properties backing the mortgages and the accrued interest an mbs payout schedule varies from many other investment vehicles while bonds may pay semiannually annually or at the previously agreed upon maturity date an mbs pays out to investors on a monthly basis while a bond payment may only include the earned interest until the maturity date where a lump sum of the original principal is returned mbs provide monthly payments of both interest and a portion of the principal the monthly payment required correlates to the traditional payment schedule of mortgage debtors 