The pass-through rate is always lower than the average interest rate paid by the borrower on the mortgages used to back the security.
The relending rate is the amount of interest, commonly known as net interest, that the issuer of a mortgage-backed security pays to investors after all costs and fees associated with servicing the investment have been paid. This rate works like the return that investors get when they choose to invest in the bonds. The reference to this interest rate as a pass-through has to do with the fact that the amount passed on to investors passes through the underlying mortgage payments, through the paying agent, and finally to the investor.
It is important to note that the pass-through rate is always lower than the average interest rate paid by the borrower on mortgages used as collateral for collateral. This is because various types of fees are deducted from the interest paid. These fees include the general administration expenses for carrying out operations related to the securities in question, as well as any type of collection of guarantees associated with the investment itself. Often these rates are set as percentages of the interest earned, although in some cases the rates are fixed rates that are set out in the terms and conditions governing the issuance of the bonds.
The creation of a pool of securitized assets involving the use of mortgages as collateral for bonds is not uncommon. Many institutions that underwrite mortgages prepare and issue financial instruments of this type. As long as the economy remains stable, the risk associated with investing in this type of bond deal remains low compared to other investment options, and the return earned as a transfer fee is likely to be considered fair for the grade of investment. risk. involved. .
In many situations, it is possible to project the amount of return an investor will earn by generating the transfer fee. As with any investment, there is the possibility of unforeseen factors that may influence the actual value of the net interest earned. For example, if the mortgages that secure the bond have a variable or floating rate instead of a fixed rate, changes in the average interest rate will affect the level of yield. For this reason, investors would do well to try to anticipate any changes in the interest rate during the life of the bond and include them in the projected transfer rate. This will help the investor determine if the yield on the bond is worth the degree of risk associated with the underlying mortgages.