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Pass-Through Security

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


Prepayment, default, and the valuation of mortgage pass-through securities
www.jstor.org [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …

Financial market innovation and security design: An introductionFinancial market innovation and security design: An introduction
www.sciencedirect.com [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …

On the determinants of yield spreads between mortgage pass-through and Treasury securitiesOn the determinants of yield spreads between mortgage pass-through and Treasury securities
link.springer.com [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …

Imperfect competition in bank retail markets, deposit and loan rate dynamics, and incomplete pass throughImperfect competition in bank retail markets, deposit and loan rate dynamics, and incomplete pass through
onlinelibrary.wiley.com [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …

The impact of the GNMA pass-through program on FHA mortgage costsThe impact of the GNMA pass-through program on FHA mortgage costs
www.jstor.org [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …

Exchange rate pass-through into import pricesExchange rate pass-through into import prices
www.mitpressjournals.org [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …

The structured finance market: An investor's perspectiveThe structured finance market: An investor's perspective
www.tandfonline.com [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …

Interest rate pass through and asymmetric adjustment: evidence from the federal funds rate operating target periodInterest rate pass through and asymmetric adjustment: evidence from the federal funds rate operating target period
www.tandfonline.com [PDF]
… Cali- fornia, Berkeley, the London Business School, the London School of Economics, the University … default allows us to value the insurance provided to the pass-through security holder … at the level of the borrower (mortgagor) and that different economic circumstances underlie …



Q&A About Pass-Through Security


How do mortgage backed securities work?

Mortgage backed securities derive their value from unpaid mortgages in which the owner of the security receives payments based on partial claim to payments being made by various debtors.

What is a pass-through security?

A pass-through security is an asset-backed security that passes through interest and principal payments from the borrower or homebuyer to the holder.

How do you securitize mortgages?

You securitize mortgages by aggregating them together into a pool, which can be sold as a single financial instrument.

What does the servicing intermediary do?

The servicing intermediary collects payments from issuers and remits or passes them through to holders of the pass through security.

What does it mean when an MBS is "pass through"?

When an MBS is "pass through", it means that the interest and principal payments from the borrower or homebuyer pass through it to the MBS holder.

Are there different types of pass through securities?

Yes, there are different types.

Is it possible for mortgage backed securities to lose all value?

Yes, if enough debtors default on their debts then it is possible for mortgage backed securites to lose all value.

How does this process work?

The mortgages are packaged together into a pool, which may be divided into tranches with varying levels of risk and reward for investors. The most senior tranche holders receive payment first in case of default, while lower tranches receive payment only after all senior tranches have been paid back in full. Mortgage pools can be traded on secondary markets such as the New York Stock Exchange or over-the counter market like NASDAQ's OTCBB market. In addition to traditional fixed rate mortgages, there has been increased use of adjustable rate mortgages (ARM) in recent years due to their flexibility and low initial rates; however these loans tend to carry higher risk than fixed rate loans because they expose borrowers to greater fluctuations in monthly payments if interest rates rise during the loan period. sup id="citeref-2" class="reference" &91;2&93;sup id="citenote-2" &91

What are some other types of asset-backed securities?

There are many different types of asset-backed securities, including collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), and commercial mortgage backed securities (CMBS).

Do investors have any control over how much money they make using these investments ?

No, investors have no control over how much money they make using these investments .

Can you compare mortgage backed securites with other bonds?

Yes, they are similar but more risky than other bonds because they can lose all value if enough debtors default on their debts.

How are these securities riskier than other bonds?

These securities can lose all value if enough debtors default on their debts.

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