Stated annual security rate used to calculate investor interest after applicable servicing and guaranty deductions.
The pass-through rate is the stated annual security rate used to calculate interest distributed to MBS investors after applicable servicing and guaranty deductions.
The pass-through rate matters because it separates borrower-level interest from investor-level cash flow. Borrowers pay interest under individual mortgage notes, while part of the interest spread can fund servicing compensation, guaranty fees, or other permitted components before security interest reaches investors.
In many fixed-rate agency pass-through contexts, MBS coupon and pass-through rate refer to the same stated security rate. The phrase pass-through rate emphasizes how investor interest is calculated; coupon is the common market label.
Borrowers do not choose this rate at closing. Their Note Rate is the contractual loan rate.
Borrowers usually encounter pass-through-rate language only when learning about MBS pricing, loan pooling, or why mortgage rates are tied to investor demand.
The term becomes practical when comparing a Pass-Through Security, MBS Coupon, Weighted Average Coupon, and the borrower’s note rate.
For a simplified uniform agency pool:
Real pools can contain different note rates and loan-level servicing spreads, so the transaction’s pooling rules and disclosures control the actual calculation. For a fixed-rate pass-through, the stated rate generally remains fixed while outstanding principal declines.
The simplified monthly investor-interest calculation is:
Actual distribution timing, day-count rules, payment delays, and adjustments follow the security documents.
| Term | Where it sits |
|---|---|
| Note Rate | Contractual rate on one borrower’s mortgage |
| Weighted Average Coupon | Balance-weighted note-rate measure across pool loans |
| Pass-through rate | Stated rate used for investor interest cash flow |
| Servicing and guaranty spread | Difference retained or charged for defined servicing and guaranty functions |
A simplified mortgage pool has a 6.25% weighted mortgage rate, a 0.25% servicing component, and a 0.50% guaranty component:
The resulting 5.50% is the simplified pass-through rate. Borrowers still pay their individual note rates; they do not receive a 5.50% loan-rate adjustment because the pool has that security coupon.
If the security has $50 million of current principal, simplified one-month interest at that rate is:
As principal pays down, the dollar amount of interest declines even though the 5.50% fixed pass-through rate does not change.
Pass-through rate differs from Note Rate because the note rate is written into the borrower loan, while the pass-through rate describes investor cash flow.
It differs from MBS Coupon mainly in emphasis rather than always in numerical value. Coupon is the security’s market label, while pass-through rate describes the rate used for investor interest cash flow.
It also differs from Guaranty Fee because the guaranty fee is a cost tied to agency support, while the pass-through rate is the investor-facing cash-flow rate after relevant deductions.