Definition: When a mortgage interest rate exceeds the interest rate paid on the security backed by the mortgage, the excess interest is “stripped” and sold as an I/O strip; referred to as I/O Strip. The “strip’ is usually described in the (notional) amount of the original security classes it was stripped from and then sold for pennies on the dollar basis. These are very volatile securities. As an example, if several loans prepay earlier than expected there many not be an interest stream to pay the interest on the ‘strips’.
