secondarymortgage.comThe Role of the indenture
Indentures define how mortgage pools operate, from asset eligibility to payment sequencing, binding all parties through trust law.
An indenture is the legal contract between the issuer and the trustee, establishing the rights of investors and duties of the servicer and issuer. It incorporates the pool’s underwriting standards, eligibility criteria for replacement loans, and default triggers. Unlike prospectuses, indentures are filed with the SEC under the Trust Indenture Act and bind all current and future holders of the securities.
Payment distribution follows the indenture’s waterfall: interest to bond classes, then principal, with subordination dictating which tranches absorb losses first. The indenture specifies how principal prepayments are allocated and whether optional early amortization events apply. Investors review the indenture to assess cash flow priority, especially when servicing fees or losses change.
The indenture also defines trustee responsibilities—including bondholder reporting, reconciliation of collections, and enforcement of covenants. It does not list individual loans but defines asset classes, cutoff dates, and representation and warranty mechanisms. Changes to key terms require a vote of affected bondholders, safeguarding investor interests against unilateral issuer action.
