Residential Mortgage-Backed Security
A residential mortgage-backed security, or RMBS, is a type of mortgage-backed debt obligation. The cash flows come from residential debt, through things such as a mortgage, home-equity loans, and subprime mortgages. In other words, a residential mortgage-backed security is a fixed income security collateralized by a residential mortgage loan and used to finance the purchase or the refinance of a home on another piece of real estate.
What can mortgage loans be used for a residential mortgage-backed security?
A residential mortgage-backed security can use many different forms of mortgages. The securities can contain one type of mortgage or a mix of different types of mortgages. You can use a fixed, floating or adjustable rate mortgage. Additionally, a RMBS can be used by any variety of credit quality, including prime and subprime mortgages.
Who can back a residential mortgage-backed security?
A residential mortgage-backed security can also be backed from government agencies such as Freddie Mac and Fannie Mae. These government agencies can offer credit protection to investors.
Additionally, a residential mortgage-backed security can be backed by a non-agency company. This means that they are not backed by the government. Instead, they are issued privately by banks and other such financial institutions. A non-agency RMBS is usually used for mortgages that do not conform to the usual requirements set forth by agencies such as Fannie Mae and Freddie Mac, such as size, documentation, and loan-to-value ratios. However, non-agency RMBS’s are rarely issued in current times.
A little bit about residential mortgage
Most residential mortgages require regular interest and principal payments for a 10, 15, 20, or 30-year term. Most residential mortgages are a 30-year term, where the mortgage loan is paid in monthly installments. The interest payments will gradually decline during the loan’s life while the principal component will increase. Fixed interest rates and floating interest rates are the two types of interest rates on mortgage loans. In general, an RMBS is the same across the board when concerning high-level characteristics, such as the original term of the loan. However, they will likely have different interest rates, borrower credit quality, and other such factors.