Suppose an institution has purchased a $250,000 mortgage loan from the loan originator and wishes to create a mortgage pass-through security. In doing so, this institution will generate revenue by charging a servicing fee of 35 basis points. If the monthly mortgage payment on the loan is $1,250, how much income is passed through to the investor in the mortgage pass through each month (rounded to the nearest dollar)

$1,177

Explanation:

First we calculate the Monthly service fee by the formula,

Monthly servicing fee = Monthly servicing fee rate * Outstanding loan balance,

The service fee is 35 basis points which translates to 0.35 % and is an annual figure so we will adjust it to a monthly one,

= (0.35%/12) * $250,000

= $72.92

To calculate amount that passes through to the mortgage pass we do,

Mortgage pass-through amount = Monthly mortgage payment - Monthly servicing fee

= $1,250 - $72.92

= $1,177.08,

= $1,177

$1,177 is the income that will pass through to the investor in the mortgage pass through each month