Pass-Through Certificate
What Is a Pass-Through Certificate?
Pass-through certificates are fixed-income securities that address an undivided interest in a pool of federally insured mortgages put together by a government-sponsored agency, like the Government National Mortgage Association (Ginnie Mae).
How a Pass-Through Certificate Works
A large percentage of mortgages that have been issued to borrowers are sold in the secondary mortgage markets to institutional investors or government agencies that buy and package these loans into investable securities. These securities are then offered available to be purchased to investors who hope to receive periodic interest payments and a principal endless supply of the securities.
The customary payments of interest and return of principal that mortgagors make on the original loan repayments are piped or passed through to investors of these securities; consequently, the name "pass-through securities."
An investor that puts resources into asset-backed security (ABS, for example, a mortgage-backed security (MBS) is given a pass-through certificate. The pass-through certificate is the evidence of interest or participation in a pool of assets and connotes the transfer of interest payments in receivables for the holders of the pass-through certificate.
Pass-through certificates are issued by banks to safeguard themselves and their clients.
A pass-through certificate doesn't mean that the holder claims the securities; it just means that the holder is qualified for any income earned from the securitized finance product. Mortgage-backed certificates are the most common types of pass-through certificates, wherein property holders' payments pass from the original bank through a government agency or investment bank to investors.
Special Considerations
Banks issue pass-through certificates as a protect against risks. Through these certificates, banks can transfer their receivables, that is to say, their long term mortgaged assets to governments and institutional investors that purchase these debt securities.
Along these lines, the bank can release a portion of these assets off its books to release more capital funds to issue more loans to borrowers. In effect, pass-through certificates guarantee that banks can keep up with their liquidity requirements as stipulated by the Federal Reserve Bank despite everything loan money ceaselessly.
The most common type of pass-through security is the Ginnie Mae pass-through, which has interest and principal payments guaranteed by Ginnie Mae to reduce the default risk inherent in these securities.
The issuers of the securities service the mortgages and pass-through interest and principal payments to the pass-through certificate holders. During periods of declining interest rates, holders of Ginnie Mae pass-throughs are probably going to receive extra principal payments as mortgages are refinanced and paid off right on time.
Features
- Mortgage-backed certificates are the most common types of pass-through certificates.
- These securities are many times put together by the Government National Mortgage Association (Ginnie Mae).
- A pass-through certificate means that the holder is qualified for any income earned from the securitized finance product.
- Pass-through certificates are fixed-income securities.
