Original Face: Definition, How It Works, and Why It Matters

What is original face?

The original face (or original face value) is the par value of a mortgage-backed security (MBS) when it is issued. It equals the total principal outstanding across all mortgage loans pooled into the MBS and represents the initial principal amount investors can expect to receive principal and interest on.

How MBSs pay investors

An MBS bundles many mortgage loans into a single security. Unlike plain bonds, an MBS returns both interest and principal in periodic (typically monthly) payments as borrowers make mortgage payments. As borrowers repay principal, the outstanding balance of the MBS declines.

Original face vs. current face

• Original face: fixed at issuance; equals the total principal of the underlying loans at inception.
• Current face: the outstanding principal remaining at any point in time. It falls as borrowers make scheduled payments or prepay loans.

Pool factor

The pool factor measures what fraction of the original principal remains:
– Pool factor = current face ÷ original face
– At issuance: pool factor = 1.0.
– Example: if half the original principal has been repaid, pool factor = 0.50.

Why pool factor and current face matter

Investors use current face and the pool factor to evaluate the predictability and size of future cash flows. Changes in prepayment behavior (faster or slower than expected) alter the pool factor and therefore the timing and amount of cash flows.

Prepayments, refinancing, and interest-rate risk

• Prepayments: Homeowners may repay mortgages early (voluntary prepayments or refinancing). Higher prepayment speeds reduce current face faster than scheduled.
• Refinancing: When interest rates fall, refinancing activity typically increases, accelerating prepayments and reducing current face.
• Reinvestment risk: Early principal repayment returns cash to investors who then must reinvest—often at lower yields in a declining-rate environment—reducing overall returns.
• Modeling risk: If actual prepayment rates differ from assumptions used at issuance, valuation and expected return can be materially affected.

Other issuance considerations

Issuers sometimes target a specific original face for institutional buyers. Because mortgage balances rarely round perfectly, the actual original face may vary slightly from the target (variance), but typically only by a small amount.

Benefits of knowing the original face

• Baseline for valuation: Original face is the reference point for measuring principal repayment and calculating pool factor.
• Performance tracking: Comparing original and current face helps assess realized prepayment experience and whether initial valuation assumptions held.
• Investment sizing: It tells investors the initial principal exposure and helps in portfolio allocation and modeling cash flows.

Key takeaways

• Original face is the total principal of an MBS at issuance and remains fixed.
• Current face declines over time as borrowers repay principal; the pool factor tracks this decline.
• Prepayments (often driven by refinancing when rates fall) accelerate principal return and create reinvestment and interest-rate risk for investors.
• Monitoring original face, current face, and pool-factor trends is essential for MBS valuation and cash-flow planning.