Stripped mortgage-backed securities (SMBS) are multiclass, pass-through, grantor trust securities created by "stripping apart" the principal and interest payments from the underlying mortgage-related collateral into two or more classes of securities. The securities so created address two distinct investment needs. SMBS deals create one or more classes of securities:
- Interest Only (IO) classes receive the interest cash flow from the underlying assets.
- Principal Only (PO) classes receive the principal cash flow from the underlying assets.
- Additional classes that may receive different portions of principal and interest.
Most SMBS can be recombined at a future date and are commonly identified by a trust number and class (e.g., SMBS Trust 318, and class 1 or 2).
In another type of SMBS transaction, excess servicing is stripped from base servicing on loans backing Fannie Mae MBS and issued solely as interest-only (IO) bonds.