Original Face

What Is Original Face?

Original face is the par value of a mortgage-backed security (MBS) at the time it is issued. An MBS is an investment that contains a number of mortgage home loans from various banks in which investors earn income from those loans.

The original face is the total principal amount originally owed on all of the mortgage loans and represents how much the MBS is initially worth. Original face is also referred to as original face value.

The mortgage-backed security's original face value is helpful since it tells investors the initial total of all of the loans within the MBS. However, the original face value does not provide investors with the value of the MBS in the future.

Understanding Original Face

Mortgage-backed securities (MBSs) are home loans that are sold by their issuing banks to a government-sponsored enterprise (GSE) or financial company and then bundled together into a single investable security. Unlike most other types of bonds, mortgage-backed securities return both principal and interest to the holder in periodic payments, usually on a monthly basis.

When an MBS is initially structured, the par value given to the pool is called the original face — the total outstanding balance at the time of its inception. Over time, this balance is reduced as borrowers make payments on their loans, resulting in a lower actual value of the MBS versus the original face value.

An MBS can be tailored for a specific need. For instance, if an institutional investor made a request for a particular face value in addition to other characteristics, the issuer would do its best to match that request. 

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. Usually, the variance is fairly minimal, such as a $1 million MBS coming in with a $1,010,000 original face.

Original Face vs. Current Face 

Once borrowers begin to make payments, the total outstanding balance owed on the MBS decreases, and this value is referred to as the current face value.

While the original face value remains fixed since it represents the initial value of the total loans outstanding within the MBS, the current face value changes over time. The mortgage-backed security's current face value is, in part, driven by borrowers making loan payments or paying off their loans early.

Original Face and Pool Factor

The pool factor is a measure of how much of the original loan principal remains and can be calculated by taking the current face and dividing it by the original face value. A newly issued MBS will have a pool factor of one at inception, meaning the original face will equal the current face. If 50% of the mortgages have been paid down, the MBS would have a 0.50 pool factor.

Investors monitor both the current face and the forecasted pool factor of an MBS to determine the predictability of the income stream from the security. Loans that are being paid down early — called prepayments — can accelerate the pool factor and reduce the current face value. Conversely, borrowers who are behind on their payments also impact the pool factor and the current face value.

Mortgage-backed securities start life with an original face value and a pool factor of one, which moves toward zero over time as payments are made on the underlying mortgages.

Mortgage Refinancing

When interest rates are low, and it becomes cheaper to borrow, homeowners are incentivized to refinance their mortgages, resulting in higher levels of prepayment of the original loans within the MBS. 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.

Interest Rate Risk

MBS investors generally do not want to see the pool factor dropping faster than planned because it results in a lower overall return for them. When a loan's principal is paid off early, future interest payments will not be paid on that part of the principal.

Quicker repayments as a result of mortgage refinancing also leave investors suddenly finding themselves with money they need to reinvest. If it's a declining interest-rate environment, investors are stuck with lower-yielding assets that pay a lower return than the MBS they had initially purchased.

Benefits of Original Face

The original face gives investors the option to choose how much money they potentially want to earn from an investment. Later on down the line, the figure continues to be consulted as a key reference point, enabling investors to establish how an MBS is doing now compared to when it first started out — and determine its return on investment (ROI).

The original face is used by traders and investors in modeling and determining valuations of an MBS over its lifetime. Identifying the original face value of an MBS at its time of inception and then comparing the value to the current face should provide an idea of how reliable those valuation assumptions were at the onset.

Looking at both original and current face values can reveal, for example, whether the assumed prepayment rate was accurate and if the valuation is higher or lower than it should be in light of the actual prepayment risk to date.