function calculatePassThroughRate() {
// Retrieve inputs
var wacInput = document.getElementById('wac');
var servicingInput = document.getElementById('servicingFee');
var gFeeInput = document.getElementById('gFee');
var resultContainer = document.getElementById('resultContainer');
var finalRateDisplay = document.getElementById('finalRate');
var totalFeesDisplay = document.getElementById('totalFeesDisplay');
var wacError = document.getElementById('wacError');
// Parse values
var wac = parseFloat(wacInput.value);
var servicing = parseFloat(servicingInput.value) || 0;
var gFee = parseFloat(gFeeInput.value) || 0;
// Validation
if (isNaN(wac) || wac < 0) {
wacError.style.display = 'block';
resultContainer.style.display = 'none';
return;
} else {
wacError.style.display = 'none';
}
// Calculation Logic
// Pass Through Rate = Gross Coupon (WAC) – Servicing Fee – Guaranty Fee
var totalFees = servicing + gFee;
var netRate = wac – totalFees;
// Prevent negative rates visually, though mathematically possible in extreme loss scenarios
if (netRate < 0) {
netRate = 0;
}
// Display results
finalRateDisplay.innerHTML = netRate.toFixed(3) + '%';
totalFeesDisplay.innerHTML = totalFees.toFixed(3) + '%';
resultContainer.style.display = 'block';
}
How to Calculate Pass Through Rate for MBS
The Pass Through Rate is a critical metric in the world of Mortgage-Backed Securities (MBS). It represents the net interest rate that is actually paid to the investor after various administrative and guarantee fees have been deducted from the gross interest collected from borrowers.
When homeowners pay their mortgage interest, they pay a gross rate (often referred to as the Weighted Average Coupon or WAC). However, the entity servicing the loan (collecting payments) and the agency guaranteeing the loan (like Fannie Mae or Freddie Mac) both take a cut before the remaining funds are "passed through" to the MBS investor.
The Pass Through Rate Formula
Calculating the pass through rate is a subtraction exercise. You begin with the gross interest rate paid by the borrower and deduct the fees required to service and guarantee the security.
WAC (Weighted Average Coupon): The weighted average gross interest rate of the underlying mortgages in the pool.
Servicing Fee: The percentage retained by the loan servicer for administrative tasks like collecting payments and managing escrow accounts.
Guaranty Fee (G-Fee): The fee paid to the guaranteeing agency to cover the credit risk of the loans.
Example Calculation
Let's look at a realistic scenario for an agency MBS pool:
Gross Mortgage Rate (WAC): 6.50%
Servicing Fee: 0.25% (25 basis points)
Guaranty Fee: 0.35% (35 basis points)
Using the formula:
6.50% – 0.25% – 0.35% = 5.90%
In this example, the investor yields a 5.90% return, while the remaining 0.60% covers the operational costs and risk guarantees of the security structure.
Why It Matters to Investors
For fixed-income investors, the pass through rate is the actual yield component derived from the coupon. It is always lower than the rate the borrower pays. Understanding the gap (the spread) between the WAC and the Pass Through Rate helps investors analyze the costs associated with the security and assess the fair value of the bond.
If servicing or guaranty fees increase, the pass through rate decreases, making the security less attractive unless the underlying WAC is sufficiently high. This calculation is fundamental to valuing mortgage-backed securities in secondary markets.