A pass through certificate (PTC) is a certificate that is given to an investor against certain mortgaged-backed securities that lie with the issuer. The certificate can be compared to securities (like bonds and debentures) that may be issued by banks and other companies to investors. The only difference being that they are issued against underlying securities. The interest that is paid to the issuer on these securities comes to the investor in the form of a fixed income. 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.
The Originator is appointed by the trust to service the loans. Servicer passes on the periodic collections from the underlying borrowers to the trust which is further passed on to the investors as per scheduled payouts. Credit Enhancement is provided to an SPV to cover the losses associated with the pool of assets. Credit Enhancement may be divided into First Loss facility and Second Loss facility. First loss facility represents the first level of financial support to a SPV as part of the process in bringing the securities issued by the SPV to investment grade. The provider of the facility bears the bulk (or all) of the risks associated with the assets held by the SPV. Second loss facility represents a credit enhancement providing a second (or subsequent) tier of protection to an SPV against potential losses.