Home Mortgage Loans

Securities 1

• How To Smash Your Mortgage
• Should You Stop Paying Your Mortgage?
• Passive Investment Income Strategies

Linda Lowell

Principal Lowell Consulting

Michael Corsi

Vice President Mortgage Strategy RBS Greenwich Capital

Pass-through securities represent ownership interests in pools of residential mortgage loans secured by single-family homes (one- to four-family units). Principal and interest payments are "passed through" to the owners of the pool on a pro rata basis, with the proviso that a small portion of the interest is held back by the issuer/servicer to cover administration expenses and guarantee fees. The amount of this servicing "strip" varies across agency programs, although it is typically at least 25 basis points. A delay necessarily occurs between the date that payment is due on the underlying mortgages and the date that aggregated payments are passed through to security holders; the length of this delay varies depending on the agency.

While pass-through securities often are spoken of as certificates, they are issued in book-entry form on the book-entry system of the Federal Reserve, and only Government National Mortgage Association (GNMA, or "Ginnie Mae") certificates are convertible to physical form. It is not necessary to own an entire pool (although many institutional investors prefer to own entire pools, the larger the better). The minimum investment is $25,000 in a Ginnie Mae pool and $1,000 in a Federal Home Loan Mortgage Corporation (FHLMC, "Freddie Mac") or Federal National Mortgage Association (FNMA, or "Fannie Mae") pool.

A diverse array of loan types may be securitized, reflecting the innovative energies of U.S. residential lenders—fueled by the existence of deep, agency-supported secondary markets—and the resulting broad array of mortgage types. However, at present, the most significant trading flows occur in the 30-year fixed, 15-year fixed, and adjustable-rate (ARM) sectors. In this chapter we will focus on fixed-rate pass-throughs owing to their deep trading flows and importance in broad fixed income market indices. ARM securities are discussed in several chapters in Section 2.