Mortgage Pay-Through Bonds

Written by Posted On Sunday, 13 August 2017 04:12
Mortgage Pay-Through Bonds Image Credit: CFA Level 1

Mortgage pay-through bonds are considered to be hybrid securities. Mortgage pay-through bonds have characteristics of mortgage backed bond (MBB) and mortgage pass-through. Mortgage pay-through bonds are usually issued against a mortgage pool. This is not different from a mortgage pay through (MPT) where the principal and interest is passed through to holders of the security. The striking difference between these two securities (MPTB and MPT) is that a mortgage pass-through bond is a debt instrument. Just like a mortgage backed bond, a mortgage pay through is a debt obligation to the issuer.

The issuer retains the ownership rights of the mortgage pool. Holders of mortgage pay-through bonds receive coupon rates of interest but the principal amount is received from prepayment of the loans in the pool and simple amortization. This procedure is not different from how mortgage pass through is managed. With this in mind, a morgage pay-through bond can be considered to be a mortgage backed bond but has pass through of prepayment and principal characteristics of a mortgage pass through.

Usually the issuance of a pay through is based on residential pools. Pay-throughs and mortgage backed bonds are overcollateralized. They include more mortgages in the pool than the total of all securities issued against it.

The credit rating of a mortage pay-through bond depends on many factors. Among which are; the extent of overcollateralization, the risk exposures of the mortgages and the features of government securities making up the excess collateral.

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Alexander Ayertey Odonkor

Alexander Ayertey Odonkor is a chartered economist and a chartered financial analyst with expertise in real estate finance and investment . Alexander completed a professional education in electronic trading in financial markets from the New York Institute of Finance. He holds a postgraduate certificate in real estate development from the Massachusetts Institute of Technology. He is a fellow of the Global Academy of Finance and Management. He has a stellar international experience in financial programming and policies from the International Monetary Fund.

www.alexanderayerteyodonkor.com

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