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Highlights
- Mortgage pass-through securities pool mortgages and sell shares to investors.
- Cash flow from the mortgage pool is passed directly to security holders.
- These securities dominate the secondary mortgage-backed securities (MBS) market.
A mortgage pass-through security, also referred to simply as a passthrough, is a specialized type of financial instrument. This security is created when one or more mortgage holders consolidate their individual mortgages into a collective unit, often referred to as a "pool." The goal is to sell shares or participation certificates in this mortgage pool to investors.
What sets a mortgage pass-through security apart is its unique structure. Investors who purchase shares in the pool receive cash flows directly from the pool’s underlying mortgage collateral. These cash flows comprise three components: monthly principal payments, interest payments, and any prepayments made on the mortgages within the pool. The term "passed through" aptly describes this process, as the payments effectively move from the mortgage holders through the pool and ultimately to the security holders.
Mortgage pass-through securities are a significant player in the financial markets. They serve as the dominant type of mortgage-backed securities (MBS) traded in the secondary market. Their widespread adoption stems from their ability to provide steady cash flows to investors while offering liquidity to mortgage lenders. This arrangement benefits all parties involved by fostering a more efficient mortgage market.
Conclusion Mortgage pass-through securities play a pivotal role in the financial ecosystem by connecting mortgage holders and investors. They offer a mechanism for mortgage holders to obtain liquidity while providing investors with a dependable source of income. As a cornerstone of the secondary MBS market, these securities continue to enable the smooth functioning of mortgage financing on a global scale.
