How is a pass-through security structured and what does the investor actually own?

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AcadiFi · Accepted Answer

In a pass-through, investors own an undivided fractional interest in the underlying mortgage pool. If Talbot Securitization Trust 2026-A holds $500 million of loans and you buy a $5 million certificate, you own 1% of every loan's future cash flow. Key rates to distinguish: - Weighted Average Coupon (WAC) — dollar-weighted average of mortgage note rates, e.g., 6.35%. - Pass-Through Rate (PT rate) — WAC minus servicing fee (25 bps) and guarantee fee (15 bps), so PT = 5.95%. - Weighted Average Maturity (WAM) — dollar-weighted average of remaining loan terms. Each month, the servicer (often the originator) collects payments, deducts fees, and remits net proceeds to the trustee. The trustee distributes cash pro-rata: every certificate receives the same 1/N slice of scheduled interest, scheduled principal, and prepaid principal. ```mermaid flowchart LR H[Homeowners] -->|P&I| S[Servicer] S -->|Net
cash| T[Trustee] T -->|Pro-rata| I1[Investor A] T -->|Pro-rata| I2[Investor B] T -->|Pro-rata| I3[Investor C] ``` Because every holder shares prepayments proportionally, the pass-through's life shortens when rates fall. That symmetry — one bond, one risk profile — is what CMOs later break apart.

How is a pass-through security structured and what does the investor actually own?

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