In a significant development for India's financial and housing sectors, residential mortgage-backed securities (RMBS)-a debt instrument backed by a pool of home loans-were listed for the first time on the NSE last week. Over ₹10,000 crore are expected to be raised through this route in this financial year alone and the development is likely to reshape the property market and housing finance landscape with new avenues for funding and investment. With this new model, lenders can extend more credit to economically weaker sections, aligning with the government's 'Housing for All' initiative by unlocking capital. Kailash Babar has the details.
What is mortgage-backed securities?
Mortgage-backed securities are investment products that are created by bundling together home loans issued by banks or housing finance companies. These pools of loans are packaged into securities and sold to investors, who then receive periodic payments in the form of interest and principal generated from the underlying home loan repayments. Commercial mortgage-backed securities (CMBS) and RMBS are two main types of MBS.
How do RMBS work?
In an RMBS transaction, a lender, such as a housing finance company, originates a pool of home loans. These loans are sold to a special purpose vehicle (SPV), which then issues securities backed by the loan repayments. Investors buy these securities and receive returns as borrowers pay their equated monthly instalments (EMIs). Credit enhancement, such as guarantees or insurance, may be used to make the securities more attractive.
What are the implications of RMBS for the financial market?
India's entry into the RMBS space has several macro implications including liquidity for housing finance companies, broader investor base, deeper bond market, and credit risk transfer. RMBS allow lenders to free up capital by moving loans off their balance sheets, enabling them to lend more. Pension funds, mutual funds, and insurance firms may consider RMBS for portfolio diversification, especially if the instruments are rated highly. The risk of borrower default is transferred from the originator to investors, making risk pricing more efficient.
What has been the global experience with RMBS?
In the US and Europe, RMBS are a key component of the debt markets. However, they also played a key role in the 2008 global financial crisis, when poorly underwritten subprime mortgages were bundled into MBS and sold without adequate risk assessment. Since then, global regulators have tightened norms and therefore RMBS markets in these markets are more robust, with better transparency, credit checks, and investor safeguards.
What does this mean for retail investors?
RMBS are currently expected to be listed for institutional investors given their complexity and high minimum investment sizes. However, with regulatory clarity and standardization, mutual funds or debt ETFs may eventually make them accessible to retail investors. Retail investors need to be aware that returns depend on borrower repayments, and defaults or early loan repayments could affect payouts. Additionally, RMBS values may decline if interest rates rise.
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Mortgage-backed securities are investment products that are created by bundling together home loans issued by banks or housing finance companies. These pools of loans are packaged into securities and sold to investors, who then receive periodic payments in the form of interest and principal generated from the underlying home loan repayments. Commercial mortgage-backed securities (CMBS) and RMBS are two main types of MBS.
How do RMBS work?
In an RMBS transaction, a lender, such as a housing finance company, originates a pool of home loans. These loans are sold to a special purpose vehicle (SPV), which then issues securities backed by the loan repayments. Investors buy these securities and receive returns as borrowers pay their equated monthly instalments (EMIs). Credit enhancement, such as guarantees or insurance, may be used to make the securities more attractive.
What are the implications of RMBS for the financial market?
India's entry into the RMBS space has several macro implications including liquidity for housing finance companies, broader investor base, deeper bond market, and credit risk transfer. RMBS allow lenders to free up capital by moving loans off their balance sheets, enabling them to lend more. Pension funds, mutual funds, and insurance firms may consider RMBS for portfolio diversification, especially if the instruments are rated highly. The risk of borrower default is transferred from the originator to investors, making risk pricing more efficient.
What has been the global experience with RMBS?
In the US and Europe, RMBS are a key component of the debt markets. However, they also played a key role in the 2008 global financial crisis, when poorly underwritten subprime mortgages were bundled into MBS and sold without adequate risk assessment. Since then, global regulators have tightened norms and therefore RMBS markets in these markets are more robust, with better transparency, credit checks, and investor safeguards.
What does this mean for retail investors?
RMBS are currently expected to be listed for institutional investors given their complexity and high minimum investment sizes. However, with regulatory clarity and standardization, mutual funds or debt ETFs may eventually make them accessible to retail investors. Retail investors need to be aware that returns depend on borrower repayments, and defaults or early loan repayments could affect payouts. Additionally, RMBS values may decline if interest rates rise.
