What is Original Face
Original face is the par value of a mortgage-backed security (MBS) at the time it is issued. Unlike most other types of bonds, mortgage-backed securities return both principal and interest to the holder in periodic payments. These payments are usually made on a monthly basis. Over time, the outstanding principal balance of a mortgage-backed security will be reduced as more payments come in, so the actual value of the MBS is lower than the original face value. Once payments commence, the shrinking total outstanding balance owing on the mortgage-backed security is referred to as current face to distinguish it from original face. The original face remains an important piece of information associated with a mortgage-backed security, as it is used by traders and investors in valuations and models over the life of the MBS. Original face is also referred to as original face value.
BREAKING DOWN Original Face
Original face is the total outstanding balance at the time of inception of the MBS. Mortgage-backed securities are often tailored for particular investors. This means an institutional investor can request a particular face value in addition to other characteristics, and the issuer will do its best to match it. Because mortgages don’t always come in easily rounded numbers, especially when investors are looking for a particular borrower profile, the targeted original face and the actual original face will likely be a bit different. This is referred to as variance and it's usually a very small difference, like a $1 million MBS coming in with a $1,010,000 original face.
Original Face and the MBS Pool Factor
The pool factor for a mortgage-backed security can be calculated by taking the current face and dividing it by the original face. By definition, a new issue mortgage-backed security will have a pool factor of 1.0 at inception; in other words, the original face will equal the current face. As the principal is paid down, the change in the pool factor becomes a measure of prepayment rates. In low interest rate environments, prepayment of mortgages through refinancing increases. This increase will show in the pool factor as the outstanding principal balance (current face) shrinks faster than in previous months, and the pool factor drops further than its normal monthly average. Investors in an MBS generally do not want to see the pool factor dropping faster than planned because it results in a lower overall return for them. It also ends up giving investors back more capital to reinvest in a lower interest environment. In other words, the investor will be unlikely to get an equal return to the investment that is being paid out early.