Question

Why does the pass-through rate differ from the average note rate paid by the borrowers in the loan pool for this security?

Answer 1

The pass-through rate differs from the average note rate paid by the borrowers in the loan pool due to the perceived riskiness of the loan and the comparison of interest rates.

Step-by-step explanation:

The pass-through rate differs from the average note rate paid by the borrowers in the loan pool for this security due to two key factors:

1. The perceived riskiness of the loan: Financial institutions consider the characteristics of the borrower, such as income level and the performance of the local economy, to assess the likelihood of loan repayment. The higher the risk of default, the less financial institutions will be willing to pay for the loan.
2. The comparison of the interest rate charged on the original loan with the current interest rate in the economy: If the original loan has a low interest rate but the current interest rates are relatively high, financial institutions will pay less to acquire the loan. Conversely, if the original loan has a high interest rate while current interest rates are low, financial institutions will pay more to acquire the loan.