CFA CFA Level 2 passthrough vs paythrough

passthrough vs paythrough

  • This topic has 5 replies, 2 voices, and was last updated Mar-17 by christine.
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    • vincentt
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      I understand what’s a pay through:

      of mortgages —pay interests &principals —> agency — after deducting fees —> investors

      So what’s a paythrough?

    • christine
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      I’m assuming you mean you understand what a pass through is, but not what a pay through is. Or the other way around.

      A pass through and pay through achieve the same thing, but the difference is that with a pass through, investors are directly exposed to the pool of mortgages (i.e. they own a small slice of the pool). In a pay through, the agency owns the entire pool, and issues a new debt security to simulate the exposure of the mortgage pool.

      What’s the difference? Liability mostly, as well as discretion in synchronizing or desynchronizing from the underlying asset (mortgage pool).

      Here’s another explanation from a research paper if it helps another:

      The nature of the investors’ interest in the underlying assets determines whether a securitisation structure is a ‘Pass Through’ or ‘Pay Through’ structure. In a pass through structure, the SPV issues ‘Pass Through Certificates’ which are in the nature of participation certificates that enable the investors to take a direct exposure on the performance of the securitised assets. Pay through, on the other hand, gives investors only a charge against the securitised assets, while the assets themselves are owned by the SPV. The SPV issues regular secured debt instruments. The term PTCs has been used in the report referring to pass through as well as pay through certificates.

      Pay through structures permit de-synchronization of servicing of the securities from the underlying cash flows. In the pay through structure, the SPV is given discretion (albeit to a limited extent) to re-invest short term surpluses – a power that is not available to the SPV in the case of the pass through structure. In the pass through structure, investors are serviced as and when cash is actually generated by the underlying assets. Delay in cash flows is of course shielded to the extent of credit enhancement. Prepayments are, however, passed on to the investors who then have to tackle re-investment risk. A further advantage of the pay through structure is that different issues of securities can be ranked and hence priced differentially.

    • vincentt
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      @christine so in short (correct me if i’m wrong), for passthrough structures cashflows are paid to all investors (pro-rata basis) whereas the pay-through will follow the tranche (PAC I, PAC II, subordinate, etc) like a CMO ? Hence, different investors in different tranche will be exposed to different level of risk though they invested in the same mortgage pool.

      Sounds right?

    • christine
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      @vincentt that’s exactly right! :-bd

    • vincentt
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      @christine thank you 😀

    • christine
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      Not a problem! B-)

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