Value of a CMO

You're going to have to explain a bit further. Has your "financial guy" (FG) co-mingled your money with that of other clients to buy the GNMA? What actually appears on the statements from the FG? How have you got the investment recorded in Q?

A GNMA bond is a bit tricky to track in Q, because they are, typically, self-liquidating. The monthly payment reflects BOTH interest, and a return of principal. Thus your number of "shares" (as Q in-elegantly tracks bonds) declines each month. But it CAN be tracked (and it's value accurately recorded) with sufficient info.

db

I think that all GNMAs are "CMO"s. I assume that with your explanation the factor represents the degree to which the instrument has been paid off. If, as you indicate, the change should be reflected in share balance, then I'd welcome your telling me the best way to track this in Quicken, as easily as possible. I have several, and can access my account to get their valuation.

I'm really only familiar with garden-variety GNMA's - a bond backed by a pool of mortgages - as opposed to a "CMO" which is typically lots of mortgage-backed bonds pooled together into a new entity. The CMO is then sliced into various "tranches" that receive cash flow from the underlying mortgages according to a pre-determined schedule. However, in either case – straight mortgage-backed bond or CMO - cash received by the holder can represent either interest or principal, or both, and it's appropriate to account for such an investment as a fixed income security.

As with any fixed income security this GNMA you're invested in can have four things going on: receipts of interest, receipts of principal, amortization of discount or premium and market price fluctuations. So the first thing you need to do is to understand any reports or other information you're receiving about this investment so you can distinguish among these events and account for them correctly. Huddle with your FG and have him teach you to do this.

Receipts of interest are easy to account for: increase your cash and increase the interest income category.

Receipts of principal (maybe that's the change in the "CMO factor" but I don't really know) are accounted for as a Return of Capital transaction. Increase cash and reduce the basis in the investment. Unless I'm missing something I wouldn't be reducing the number of shares (bonds) unless there's an actual sale transaction.

Amortization of premium or discount can typically be handled once a year (assuming you're planning on holding this investment to maturity) and is a little trickier as it requires two entries in Q. For amortization of discount you'd do a Return of Capital transaction entering the "cash" portion as a *negative* number, then an Interest Income transaction with a positive cash in the same amount.

Market price fluctuations are handled just as with any other security: change the quote/price as appropriate.

It seems like the biggest problem you're having is you really don't understand the investment and the information you're receiving about it.

Tom Young

I'll concede that it's been a long time since I was in securities operations ... but my recollection is that GNMA bonds track the pool of mortgages that underlie them.

So that, as a mortgage is paid off (due to re-financings, sale of the property, etc), the principal is returned to the investor at that time and the face value of the GNMA bond is reduced accordingly. And that the monthly payment to the investor includes the principal payment that the borrower makes each month ... thus further reducing the principal amount of the GNMA bond.

THUS, the last payment -- at maturity -- of the GNMA bond, includes only that principal which remains in the underlying pool of mortgages ... which is typically fairly small. The investor doesn't get back the full $1000 (per bond) face value because that's already been included in each of the monthly payments that they've received.

Furthermore, my recollection is that close to maturity (say, 1 month before ... when most bonds would be trading at awfully close to face value), a GNMA will trade for a small fraction of face, since most of the principal has already been returned.

If I'm remembering correctly, then each monthly payment WOULD constitute a partial sale of the "shares". The alternative would show a constantly declining price for the "shares" (as opposed to a price fluctuating with market rates), because the value of the 1000 shares would be constantly eroded by the return of capital.

db

This will be my last post on this topic. I appreciate all the learned discussion - none of which addressed my question - Is there a way to handle this in Quicken?

Yes, that's right. The bonds aren't just "secured" by mortgages; it's the mortgages that provide the cash flow for the bond meaning that each payment can fluctuate due to prepayments, refinancing, etc.

Yes, I agree.

Yes, the accounting is pretty much exactly like you as a lender would account for an amortizing mortgage.

Right. Just like a mortgage. If you're the lender and the borrower pays each monthly payment per contract the last payment typically only has a few pennies of principal included.

If a mortgage lender holds mortgages "for sale" then the "alternative" is exactly the accounting they follow. Each payment by the borrower returns some of the principal, reducing the mortgage on the lender's books. But, out in the market, prices for that mortgage are constantly changing and they mark the mortgage appropriately. So, at origination, the price might be 100.00 (they made the loan at market) and a year later because of rising interest rates or whatever, the price might be 96.7 which is applied to the *remaining* principal of the mortgage. At some point they might sell a mortgage with a remaining principal of $197,382 (original mortgage was for $200,000) for 100.63 meaning the buyer would pay $197,382 x 100.63 and the originator would book a profit.

Tom Young

Yes. As a fixed income instrument as outlined above. If you're really asking "Is there a way Quicken can handle all of the accounting for this *automatically* without me having to make any entries on my own" then the answer is "no." Quicken doesn't deal *automatically* with constantly fluctuating payments with different amount of principal and interest and there's no way to have Quicken go out and get a market price on a CMO since they typically don't have a ticker symbol.

Tom Young

Tom Young

I'll amend what I said here to say that if the CMO has a CUSIP and the FI holding the security has the ability to send updates to Quicken then there might be a way to have Quicken account for this automatically and show the proper value of the CMO. Check with your FI to see if they offer this.

Tom Young

I said I was going to shut up on this topic, but you are good enough to try to help - so This is sorta the root of the problem. When I download the transactions in that account, they update the price. Unfortunately that price does not reflect the factor, but their calculation of value does. I just have to realize what's happening and adjust the price accordingly.

What if you SELL a portion of the "shares" of the GNMA each month, in an amount, at $1 each, to account for the principal portion of the monthly payment? And also enter an "Interest received" transaction?

db

I must admit I'm not understanding what's going on here. Maybe you could post some numbers to help me understand.

It sounds like you're saying (I'll just make up some numbers):

"I have 10 units of this GNMA CMO. The FI downloads the price into Quicken and today's price is $1,375,253.00. But, that's the price of the entire CMO, not just my 10 units. In order to properly price my holdings I have to go to the FI's website, log into my account, and look up the 'CMO factor' that changes constantly. Today the CMO factor is .0752. Multiplying .0752 times $1,375,253.00 equals $103,419.0256 which represents the value of my 10 units, meaning each unit is priced at $10,341.90256."

If I've got the scenario more or less correct then it sounds like the FI would have to do some programming to fix the OFX log that gets downloaded into Quicken.

If I don't have the scenario right maybe you could redo the above example.

Tom Young

Let's try this.

ALL Bonds are priced at, what is actually, a percent of the principal value. For most bonds, principal amount and face are the same number ... not so for GNMA's. SO, for a $1000 face regular bond, a price of $98.60 means that the price of the principal portion of the bond is $986.00. The $98.60 amount, for a GNMA, means 98.6% of the CURRENT principal value.

In Quicken terms, where a $1000 bond is represented as 10 shares of the bond, you'd show a purchase of 10 shares at $98.60 for a total of $986.00 if you bought at issue.

When a monthly payment, of say $35 principal and $10 interest, arrives you'd record a SALE of 0.035 share ($35 divided by $1000 face) at $1.00 per share and an "Interest Received" of $10.

Q now shows 9.965 shares of the bond. At a price of $98.60, your bond now has a principal value of $982.549 (9.965 shs times $98.60).

IF you didn't buy at original issue, you'd need to adjust that opening buy appropriately ... but the concepts still work.

db

If you try out your numbers in a test data base you'll find their not working out as planned. Quicken keeps track of the basis of a holding using the transactions that affect basis, e.g., purchases, returns of capital, sale of shares (take your pick of LIFO, FIFO, Avg cost), etc. It keeps track of market value of a holding via the number of units and a unit price. In the example we're working with, market value of the holding is a function of a price that's multiplied by basis, a form of accounting Quicken doesn't support. If you try to "trick" Quicken by changing the units number you'll almost inevitably mess up the real basis and capital gains and losses. Your example above has you recording a capital loss on the "sale" that's really a return of capital, misstates the cash received and ends up with a basis within Quicken that's not correct, all to get the market value of the position correctly stated.

I think if you want to keep track of the market value of an amortizing loan receivable (or 10 "units" of a loan receivable) where by convention market prices are quoted in terms of remaining principal then you have to determine the market price of your 10 units outside of Quicken e.g., .974 x $103,412.13 (the amortized principal of your

If the OP comes back with some real numbers maybe we'll be in a better position to see what's going on. Given the way Quicken works it just might not be possible to have an OFX log come up with the correct answers all around unless the FI is willing to do some special programming.

Tom Young