Business Definition for: pass-through security
pass-through security
security, representing pooled debt obligations repackaged as shares, that passes income from debtors through the intermediary to investors. The most common type of passthrough is a
mortgage-backed certificate
, usually government guaranteed, where homeowners' principal and interest payments pass from the originating bank or savings and loan through a government agency or investment bank to investors, net of service charges. Pass-throughs representing other types of assets, such as auto loan paper or student loans, are also widely marketed.
See also
REMIC
,
Certificate for Automobile Receivables (CARS)
,
Collateralized Mortgage Obligation (CMO)
pass-through security
security that passes payments from borrowers to investors as loan payments are collected. Its cash flow is from a pool or pools of underlying loans. The issuer remits, or passes through, to the investor monthly payments of principal and interest. Servicing of the underlying loans is usually done by the seller, who is paid a servicing fee. Actual lives of pass-through securities can be shorter than the stated maturity, because in periods of falling interest rates, borrowers pay off their loans early.
See also
pay-through security
pass-through security
security that passes income from debtors through intermediaries to investors. The most common form of pass-through is a mortgage-backed security, in which the principal and interest payments from homeowners are passed from the banks, mortgage bankers, or savings and loan associations that originated the mortgages to investors.
Related Terms:
acronym for real estate mortgage investment conduit, a passthrough vehicle created under the tax reform act of 1986 to issue multiclass mortgage-backed securities. REMICs may be organized as corporations, partnerships, or trusts, and those meeting qualifications are not subject to double taxation. Interests in REMICs may be senior or junior, regular (debt instruments) or residual (equity interests). The practical meaning of REMICs has been that issuers have more flexibility than is afforded by the Collateralized Mortgage Obligation (CMO) vehicle. Issuers can thus separate mortgage pools not only into different maturity classes but into different risk classes as well. Whereas CMOs normally have AAA bond ratings, REMICs represent a range of risk levels.
pass-through security backed by automobile loan paper of banks and other lenders.
mortgage-backed bond that separates mortgage pools into different maturity classes, called tranches. This is accomplished by applying income (payments and prepayments of principal and interest) from mortgages in the pool in the order that the CMOs pay out. Tranches pay different rates of interest and can mature in a few months, or as long as 20 years. Issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) and private issuers, CMOs are usually backed by government- guaranteed or other top-grade mortgages and have AAA ratings. In return for a lower yield, CMOs provide investors with increased security about the life of their investment compared to purchasing a whole mortgage-backed security. Even so, if mortgage rates drop sharply, causing a flood of refinancings, prepayment rates will soar and CMO tranches will be repaid before their expected maturity. CMOs are broken into different classes, called companion bonds or planned amortization class (PAC) bonds.
mortgage-backed bond collateralized by a pool of mortgages. Also called a cash flow bond. These securities are fully amortizing bonds resembling modified pass-through securities, paying interest at scheduled intervals, monthly or quarterly. The scheduled amortization of the bonds is met by collateral cash flow representing loan payments by mortgage borrowers. Early loan prepayments accelerate bond redemptions. An example of a pay-through bond is a Collateralized Mortgage Obligation.
Referring Terms:
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Copyright c 2006, 2000, 1997, 1993, 1990 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
