Least Accurate Statement about U.S. Agency Mortgage-Backed Securities

C

The correct answer is option C. The statement that is least accurate among the given options is:

C. Collateralized mortgage obligations (CMO) redirect cash flows from the underlying mortgage pool to eliminate prepayment risk.

Explanation:

A. Cash flows from mortgage loans include prepayments, which could affect the future performance of Hart's portfolio.

This statement is accurate. Mortgage-backed securities (MBS) are created by pooling together a group of individual mortgage loans. Cash flows from these mortgage loans include both scheduled principal and interest payments, as well as prepayments. Prepayments occur when borrowers choose to pay off their mortgages earlier than the scheduled repayment date. Prepayments can affect the future performance of the portfolio because they can impact the duration and yield of the mortgage-backed securities.

B. Pass-through securities issued by Ginnie Mae guarantee the timely payment of interest and principal.

This statement is accurate. Ginnie Mae (Government National Mortgage Association) is a U.S. government agency that guarantees the timely payment of principal and interest on mortgage-backed securities. Pass-through securities issued by Ginnie Mae are backed by the full faith and credit of the U.S. government, which means that investors are protected against credit risk.

C. Collateralized mortgage obligations (CMO) redirect cash flows from the underlying mortgage pool to eliminate prepayment risk.

This statement is least accurate. Collateralized mortgage obligations (CMOs) are structured mortgage-backed securities that redistribute the cash flows from the underlying mortgage pool into multiple classes or tranches. These tranches have different risk and return characteristics. However, CMOs do not eliminate prepayment risk. In fact, CMOs are specifically structured to manage and allocate prepayment risk among the different tranches. Each tranche of a CMO is designed to receive a different portion of the cash flows from the underlying mortgage pool, which helps to mitigate prepayment risk and provide investors with a more predictable stream of cash flows. However, prepayment risk still exists in CMOs, and it is distributed among the different tranches based on their priority of receiving cash flows.

In summary, while options A and B are accurate statements regarding U.S. agency mortgage-backed securities, option C is the least accurate statement as it incorrectly suggests that CMOs eliminate prepayment risk.