Pass-Through Rate

You hold a mortgage-backed security. It's not 2008 anymore, so you don't have to be ashamed...or keep your MBS in a lead box buried in a bunker in your backyard.

The payout on your MBS is 5.5%. That figure represents the interest rate you receive as the owner of the security. However, that doesn't represent the average rate of the underlying mortgages. Some fees have to be paid. A portion of the money paid by the homeowners gets eaten up by these expenses.

A homeowner with a mortgage at 6% has their loan packaged together as part of an MBS. The security includes a bunch of other mortgages with rates of around 6%. However, the 6% interest earned from those mortgages doesn't pass directly to the MBS holder. Some portion of the mortgage revenue gets siphoned off for various fees (management expenses, guarantee fees, etc.). So the rate received by the holder of the mortgage-backed security isn't quite as high as the rate getting paid into the mortgage pool.

The rate received via the MBS is called the pass-through rate. It's the rate you get as the holder of the investment. It's the net rate, after all the intermediary fees get removed from the revenue stream.