MBS (CMO)

• After mortgage loans are transferred to KHFC, KHFC establishes a trust with itself as a trustee to issue MBS.
• As P&I payment of MBS can be affected by the trust performance, KHFC provides guarantee for the timely P&I payment of MBS to investors, thereby securing the stable MBS redemption.
• MBS consist of 9 tranches with maturities of 1, 2, 3, 5, 7, 10, 15, 20 and 30 years. MBS with 5-year or longer maturities are callable. (Every three months, call option can be exercised, starting from the tranches with a shorter maturity.)

Pass-through MBS

• In a pass-through MBS, which is already a common type of MBS in the US and Japan, the monthly P&I payment is funnelled to investors after fee deduction.
• As such, in a pass-through MBS, all the prepayment of its underlying assets is passed to investors, matching the time of MBS payment and the time of payment of the underlying assets. This makes the future cash flow more predictable.
• As compensation for their exposure to prepayment risk, MBS investors are paid with premia in comparison with bullet bonds.

Mortgage-MBS SWAP

• In Mortgage-MBS SWAP, MBS issued by KHFC with pools of mortgage loans transferred from financial institutions are transferred back to the financial institutions.
• By swapping mortgage loans with MBS, which are profitable but risk-free assets, financial institutions can improve their profitability and BIS ratio while maintaining their asset size.