Mortgage-backed securities can be very complicated. That's because mortgage-backed pools have several components that must be included in Date-of-Death and Alternate Date valuations.
Variables in mortgage-backed securities include the market value of the remaining balance, interest accruing throughout the current interest period, any accrued principal from prior months and any accrued interest from prior interest periods. Also, careful consideration of principal payments between the Date-of-Death and the Alternate Date is required for Alternate Date valuations. Our EstateVal takes into account all of these components.
Pay down factors are reported as a percentage of the original face value (e.g. a factor of 0.911448605). This factor is multiplied by the face value to obtain the remaining principal, which, in turn, is multiplied by the mean price to obtain the value of the security. The formula is:
Value = Face Value x Factor x (Mean Price ÷ 100)
Accrued interest is reported on a 30/360-day count basis. Interest for the current month is calculated from the record date (month-end) to the Date-of-Death. Interest from prior months is reported separately if the Date-of-Death is between the record date and the payment date.
However, accrued principal is reported if the Date-of-Death is between the record date and the payment date. This anticipated principal payment is for the month(s) prior to the Date-of-Death.
In the case of Alternate Date valuations, the security value is based on the new unpaid balance or pay down factor. Principal paid between the Date-of-Death and the Alternate Date is reported as a separate value.
Even this explanation is hard to follow. Those needing to value mortgage-backed securities don't need to know any of this. EstateVal takes care of it. Also, if this valuation is done for the IRS, they will use EstateVal to verify it.
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