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Also known as a current par value, a current face is the latest par value on some type of mortgage-backed security. The term refers to the remaining monthly principal that is associated with the security that backs the mortgage. Over time, the current face of the security will decrease, as payments and interest are applied to the outstanding balance.
Knowing the current face can be important to investors. Ideally, the investment will yield a steady return over the life of the mortgage that backs the security. Tracking the gradual repayment of the mortgage and the impact of those payments on the current face make it easier to project how long to hold on to the security before offering it for sale. Since the current par value can be recalculated each time a payment is made on the underlying mortgage, investors can revisit the status of the investment on a monthly basis, and possibly more often if interest is also applied at times other than the payment dates.
The process for calculating the current face of any mortgage-backed security is simple. By multiplying the current pool factor, also known as the principal balance factor, by the original face value of the security, it is possible to determine the current par value. This is very helpful, in that the calculation allows the investor to determine the rate of return on the investment, and ensure that the return is occurring at an acceptable pace.
It is important to note that the current face for any two mortgage-backed securities can vary, even if both securities started with the same original face value, and were issued on the same date. If one of the securities receives more payments on the outstanding balance than the other, the current par value for that security will be different. Thus, the current face is always impacted with how quickly payments are received and applied.
As with all types of investments, there is some degree of risk associated with any mortgage backed security. In this scenario, the risk has to do with the consistency and speed of the prepayment of the balance on the underlying mortgage loan. In the event that payments are not made according to the terms of the loan, this will have a direct impact on the amount of the current face value of the security. For this reason, investors should look closely at the loans that back the security, and determine if the level of prepayment risk is within an acceptable range before making any type of commitment.