What is Current Face
Current face is the current par value of a mortgage-backed security (MBS). When a mortgage-backed security is initially structured, the par value given to the pool is called the original face. Simply put, the original face is the total outstanding principal balance at issue, and the current face is the total outstanding principal value at any point thereafter. Naturally, as payments come in and the principal of the underlying mortgages in the pool is paid down, the current face declines compared to the original face. Current face is calculated by multiplying the current pool factor by the mortgage-backed security's original face value.
Current face is also referred to as current face value.
BREAKING DOWN Current Face
Current face is basically a snapshot of how a mortgage-backed security is doing now compared to when it started out. By looking at the current face, an investor can check the valuation assumptions that were made when the MBS was created. This leads to questions like whether or not the assumed prepayment rate was accurate and whether the valuation is higher or lower than it should be in light of the actual prepayment risk to date.
Why Current Face Matters
Mortgage-backed securities with the same issue date, same coupon and same original face value can have greatly different current faces. Mortgage-backed securities pay down at different rates based on the characteristics of the underlying loans, for example, the pool may be made up of borrowers of high credit worthiness who can refinance easily if interest rates drop. Even if the borrowers are roughly equivalent in terms of credit rating, there are bound to be differences in the actual prepayment speed of underlying mortgages as people move, pass away or otherwise see their circumstances change.
Holders of MBS do want to see the underlying mortgages repaid, as that is where they get their principal and interest on the investment from. However, they do not want to see current face falling faster than planned. The pricing of an MBS is usually done using a model that optimizes the pool so an investor knows what he or she is getting over time. That said, the interest rate environment affects mortgage-backed securities more than most debt-backed investments. Borrowers tend to refinance at the worst possible time for investors, returning capital to them in a low-interest environment where yields are hard to come by. If prepayment increases more than was projected, the investment won't have the returns that were initially expected. In short, faster-than-expected drops in the current face of an MBS are bad news for the investors.