What Is Current Face? Meaning, Calculation, and Benefits
Learn what current face means, how it’s calculated, and why it matters in finance, particularly in the context of amortizing securities.
Understanding the value of a mortgage-backed security (MBS) over time is important for investors. One key metric used to track this is “current face,” which reflects the remaining principal balance of an MBS after payments have been made. This figure changes as borrowers make mortgage payments, affecting the security’s value and performance.
Since these securities are tied to pools of mortgages, their cash flows fluctuate based on borrower behavior. Investors use current face to assess risk, price securities accurately, and estimate future returns.
Meaning of Current Face
Current face represents the outstanding principal balance of a mortgage-backed security at a given time. Unlike the original face value, which reflects the initial principal when issued, current face adjusts as borrowers make payments, prepay loans, or default. Expressed as a percentage of the original face value, it helps investors track how much principal remains.
As payments reduce the balance, the current face declines, influencing cash flow and duration. A lower current face means fewer remaining principal payments, impacting expected returns. This is particularly relevant for securities backed by residential mortgages, where prepayment rates vary with interest rate movements. If rates drop, homeowners may refinance, accelerating the decline in current face.
Current face also plays a role in structuring collateralized mortgage obligations (CMOs), where different tranches receive payments based on changing principal balances. Investors in senior tranches may see faster principal repayments, while subordinate tranches absorb more risk. Understanding these dynamics helps investors assess performance and potential risks.
Calculation of Current Face
To determine the current face of a mortgage-backed security, investors start with the original face value and adjust it based on principal payments received over time. Each month, as borrowers make scheduled payments or prepay loans, the outstanding principal decreases. Expressing the remaining balance as a percentage of the original face allows investors to track how much of the principal remains active.
For example, if an MBS had an original face value of $10 million and $2 million in principal has been paid down, the current face would be 80% ($8 million remaining principal divided by $10 million original principal). This percentage is key for pricing and valuation, as it directly affects expected cash flows and yield calculations.
The rate of decline in current face depends on scheduled amortization, prepayment rates, and defaults. Mortgage-backed securities with high prepayment speeds—often measured by the Conditional Prepayment Rate (CPR)—see faster reductions in current face, affecting investor returns. Securities with slower prepayment rates retain a higher current face longer, extending their cash flow duration.
Benefits of Current Face
Investors rely on current face to make decisions about portfolio allocation, risk exposure, and cash flow expectations. Tracking the principal balance allows them to adjust strategies based on market conditions. This is particularly important in fluctuating interest rate environments, where changes influence borrower behavior and repayment speed.
Current face also helps assess liquidity. Mortgage-backed securities with a higher remaining principal balance tend to be more liquid, offering more predictable cash flows. Institutional investors, such as pension funds and insurance companies, often prefer securities with a larger current face since they provide a steady stream of payments. Smaller balances may be harder to trade due to reduced market demand.
Another advantage is evaluating reinvestment risk. As principal is repaid, investors must decide how to reinvest these funds. If interest rates have declined since the purchase, finding comparable returns can be challenging. Monitoring current face helps investors anticipate significant principal reductions and plan reinvestment strategies accordingly.