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Asset Securitization: Theory and Practice by JOSEPH C. HU

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Chapter 7

Residential MortgagePass-Through Securities

A mortgage pass-through security, or simply a mortgage pass-through, is backed by a pool of mortgages for which the monthly payments are the sole source of cash flow for the security. The security is called a pass-through because the monthly payments generated from the underlying pool of mortgages are passed from the borrowers (mortgagors) through the issuer (servicer) to the investors of the security.

Mortgage Pass-Throughs

This chapter will discuss the evolution of the various types of residential mortgage pass-throughs. During the 1970s and the 1980s, the RMBS market evolved to create four major types of pass-throughs to facilitate mortgage financing for homebuyers. They are: government-guaranteed mortgage pass-throughs (Ginnie Maes), GSE-guaranteed mortgage pass-throughs (Fannie Maes and Freddie Macs), private-label pass-throughs, and subprime mortgage-backed securities. They represented the four pillars of the U.S. housing finance system. Each pillar is distinctive in its unique way of facilitating finance for a specific type of homebuyer. Combined, the four pillars provide housing finance for Americans from all walks of life. This chapter will also introduce the concept and terminology of mortgage pass-throughs and their trading and relative value.

Ginnie Mae Mortgage Pass-Throughs

As briefly mentioned in Chapter 1, mortgage pass-throughs were first issued by mortgage bankers in 1970. They issued pass-throughs backed ...

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