Pass-Through Security

By
rjonesx
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What is ‘Pass-Through Security’

A pass-through security is a pool of fixed-income securities backed by a package of assets. A servicing intermediary collects the monthly payments from issuers and, after deducting a fee, remits or passes them through to the holders of the pass-through security. It is also known as a “pass-through certificate” or “pay-through security.”

Explaining ‘Pass-Through Security’

The term pass-through relates to the transaction process itself, whether it involves a mortgage or other loan product. It originates with the debtor payment, which passes through an intermediary before being released to the investor. The most common type of pass-through is a mortgage-backed certificate, in which a homeowner’s payment passes from the original bank through a government agency or investment bank before reaching investors.

Risks Associated with Pass-Through Securities

The risk of default on the debts associated with the securities is an ever-present factor, as failure to pay on the debtor’s part results in lower returns. Should enough debtors default, the securities can essentially lose all value.

Mortgage-Backed Securities

Mortgage-backed securities derive their value from unpaid mortgages, in which the owner of the security receives payments based on a partial claim to the payments being made by the various debtors. These securities are generally self-amortizing. Multiple mortgages are packaged together, forming a pool, spreading the risk across multiple loans.

Further Reading

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