Residential mortgage-backed securities (RMBS) are a type of asset-backed security (ABS) that is collateralised by a pool of residential mortgages. RMBS are typically issued by financial institutions, such as banks and mortgage lenders. RMBS can be divided into tranches, with each tranche having a different level of risk. Investors in RMBS receive payments from the underlying mortgages, such as interest payments and principal repayments.
RMBS are an important source of funding for the residential mortgage market.
Here are some applications of RMBS in securitisation:
- Mortgage lending: RMBS can be used to finance mortgage lending. For example, a bank could securitise a pool of its residential mortgages and issue RMBS to investors. This would allow the bank to raise funds to lend to other borrowers.
- Investment: RMBS can be used as an investment by investors. Investors can buy RMBS to earn a return on their investment.
- Risk management: RMBS can be used to manage risk by investors. For example, an investor could buy a tranche of RMBS with a lower risk profile than the underlying mortgages. This would reduce the investor's exposure to risk.
RMBS are a complex financial product and there are risks associated with investing in RMBS. Investors should carefully consider the risks before investing in RMBS.