Original face is a finance term that relates to the original value of a mortgage-backed security. For example, a bank groups several mortgages together in a package for sale to an investor. The par value (original face) of this security is $700,000 US Dollars (USD). As homeowners make payments against these mortgages, the value will decrease, although the par value is always $700,000 USD. The original value of the mortgage-backed security is important, as this represents the historical value to the investor and is used to determine the return on investment.
Mortgage-backed securities are a common investment vehicle, although the term has soured somewhat with the economic downturn affecting many nations from 2007 to 2010. Financial service companies will create these investments by packaging a wide variety of mortgages into one single investment. This is a newer form of selling mortgages. Historically, banks and lenders would sell individual mortgages on a secondary market. Companies can avoid this lengthy process by creating an original face mortgage-backed security. This allows banks and lenders to package good loans with bad, relieving their accounting books from both mortgages.
The original face of mortgage-backed securities will reduce by the payments received each year from the borrowers listed in each mortgage in the security investment. For example, the $700,000 mortgage-backed security may include five individuals of mortgages worth $140,000 each. An investor purchasing the mortgage-backed security essentially loans money to these homeowners. As homeowners make their monthly payments, investors will deduct the payments from the original face. Annual payments of $12,000 USD will result in a total of $60,000 USD deducted from the par value of the $700,000 USD mortgage-backed security.
Investors expect to earn a set financial amount when investing in mortgage-backed securities. Because the original face is the amount paid for the investment, missed mortgage payments can result in lower financial returns on the investment. For example, each year the investor expects payments of $60,000 USD on his mortgage-backed security. However, if the investor only receives $55,000 USD for the year, he must attempt to collect the additional $5,000 or lose this money forever. If the money is uncollectable, the investor must write this off as a loss against his overall investment gains or losses.
Many investment groups will have a large portfolio of money they can spend on investments. The original value of the mortgage-backed securities is important because investors will limit how much they purchase in this security. To diversify risk, investors will purchase other securities among different investment types.
