Structured Nonagency IO Tranches

As we know, an interest only (IO) strip is a class of security that receives its payments only from the interest payments on the underlying mortgage. An interest only tranche will typically benefit from rising interest rates and slowing of prepayment rates.

IO tranches can also be created from non-agencies securities. A non-agency security would not be backed by any guarantee from federal government agency.

For nonagency securities, the underlying loans are non-conforming loans, that is, these loans do not qualify for inclusion in collateral pools for agency mortgage-backed securities.

For non-agency deals, there is a special class of IO and PO strips generated called WAC PO and WAC IO strips. These are used to build a fixed pass-through rate on a deal.

Interest-only strips, due to high prepayment risk, cannot be classified as held-to-maturity securities.