ABSTRACT
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Appendix 7.A: Tables and Graphs for Data Sets ‘Flat’ and ‘Steep’. . . . . . . . . . 168
H ISTORICALLY, THE BUSINESS OF CONDUITS, like Freddie Mac, Fannie Mae or Ginnie Mae,has been to purchase mortgages from primary lenders, pool these mortgages into mortgage pools, and securitize some if not all of the pools by selling the resulting
Participation Certificates (PCs) to Wall Street. Conduits keep a fixed markup on the
interest for their profit and roll over most of the (interest rate and prepayment) risk to the
PC buyers. Recently, a more active approach, with the potential for significantly higher
profits, has become increasingly attractive: instead of securitizing, funding the purchase of
mortgage pools by issuing debt. The conduit firm raises the money for the mortgage
purchases through a suitable combination of long-and short-term debt. Thereby, the
conduit assumes a higher level of risk due to interest rate changes and prepayment risk but
gains higher expected revenues due to the larger spread between the interest on debt and
mortgage rates compared with the fixed markup by securitizing the pool.
