Mortage pass-through

While discussing securitization, Culp says: “A pass-through is a single-class ABS; all holders of the same class of MBS have the same priority and enjoy pro rata distributions of the underlying cash flows.” I have a few doubts here: 1.Then why do we so often use the word Multi-class passthrough? 2. A single-class passthrough would mean that there are not more than one tranches. Is my understanding correct? 3. Why is sub-ordinate tranche the “residual/whats left over” class? Is it not equity which is sub-ordinate to the subordinated debt? Hence, is it not equity which is residual actually? Thanks in advance.

There are no tranches in pass-throughs. You are confusing CMOs and pass-throughs.

Can someone elaborate please? Or just pass on a link if you can do so. I tried to search a lot but haven’t been able to figure out the answer to above three questions. Could someone also highlight the major differences between CMOs and Passthroughs as pointed out by Maratikus. Thanks again guys.

  1. multi-class passthrough would be a CMO. 2. yes, as maritikus said, there aren’t tranches in pass-throughs. 3. support tranches- pg 365 in the CFAI book on FI, take a read. pass throughs are pg 328, CMO’s are pg 344. each section is over 20 pgs… but after a read it should come in a lot clearer I think.

So, MBS’s wouldent have tranches either? Only CMO’s? Is that the main difference between the two…?

Here is my take on this: A MBS is a pool of mortgages in which all the mortgages making up the MBS are usually homogenous, meaning they have very similar parameters of Coupon, maturity, loan age etc. Mortgage borrower payments from the pool of mortgages making up the MBS are lumped together and “passed” on to the investors. There are no other complexities in the structure; the principal and interest payments are passed straight through to the investors. A CMO meanwhile, is made up of a bunch of MBS’s. Its a derivative off of the MBS securities. Its structue involves a list of “tranches” with different parameters and a different peking order as to how and when they get paid the principal and interest originating from the pool of MBS securities baking the CMO (also called the CMO pool collateral). As compared to the MBS securities, the principal and interest payment paid by the mortgage borrowers are first paid to the MBS security and then all these payments from all such MBS securities are lumped togeter and paid out as per the CMO deal’s payment rules (described in a prospectus). As you can see, CMO payments are not “a straight pass-thru’s” to investors. hope this helps.

“A pass-through is a single-class ABS” is a weird clause. I think a pass-through is an entity that hands off cash flows to other entities, perhaps takes fees, but is not reposnible for generating those cash flows. For example, an LLC is a pass-through for tax purposes. An MBS is almost certainly a pass-through. Mutual funds are even pass-throughs. I think ABS is a security backed by a pool of assets. MBS is a kind of ABS backed by mortgages. CMO is an MBS that surely includes tranching while an MBS could be whole loans. “Sub-ordinate tranche” doesn’t really go with CMO because subordination generally refers to credit risk (but I think that most people would think that subordinate means “supporting” but possibly later in a sequential tranching).

johnnyblazini Wrote: ------------------------------------------------------- > So, MBS’s wouldent have tranches either? Only > CMO’s? > > Is that the main difference between the two…? CMO and MPS are types of MBS. (this article isn’t very good, one of us should fix it)

Here is an excellent chapter on CMO’s and MBS’s from the fixed income guru, Frank Fabozzi.,M1,M1

Fabozzi is tha man… Thanks yodhava…!

most welcome, johnnyb. Fabozzi is really da man when it comes to fixed income.