A security created when one or more mortgage holders form a collection (pool) of mortgages and sell shares or participation certificates in the pool. Also called a pass-through.
A mortgage pass-through security consists of a set of marketable shares in a portfolio of mortgages for which investors receive monthly payments of both interest and principal. Normally the package is secured by credit insurance so that investors are protected from the credit risks of the individual mortgages in the portfolio. However, no protection is provided against the cash flow and return volatility associated with unanticipated principal prepayments, which typically occur when interest rates drop and homeowners refinance their mortgages.
A conventional pass-through is a mortgage pass-through security that is not guaranteed by a government agency. Also called a private-label pass-through.
See also: Agency Pass-through