MORTGAGE SWAP
An asset swap attached to fixed-rate mortgage payments. Mortgage swaps allow investors to enjoy the flows from a portfolio of mortgages without taking a mortgage asset on to their balance sheet. The principal reduces if and when the outstanding mortgage principal reduces (which can occur if the mortgage holder pays off the mortgage or defaults). Such swaps are complicated because although the fixed-rate receiver receives a higher rate than on a normal swap, the amortisation of the principal is not just a function of interest rates. The largest mortgage swap market is in the US; in 1992 and 1993 prepayments accelerated because of historically low interest rates.