Residential mortgage-backed security (RMBS) is a type of asset-backed security (ABS) that is secured by a pool of residential mortgages.
- RMBSs are typically issued by financial institutions, such as banks and mortgage lenders.
- RMBSs are a way for investors to invest in the mortgage market without having to purchase individual mortgages.
The cash flows from the underlying mortgages are used to pay the interest and principal on the RMBSs.
RMBSs are typically divided into tranches, with each tranche having a different risk profile.
The tranches with the lowest risk are called senior tranches, and the tranches with the highest risk are called subordinated tranches.
Investors who are looking for a low-risk investment will typically purchase senior tranches, while investors who are looking for a higher-yielding investment will typically purchase subordinated tranches.
RMBSs are a popular investment for a variety of investors, including pension funds, insurance companies, and hedge funds.
Here are some applications of RMBS in securitisation:
- To raise capital: RMBSs can be used by financial institutions to raise capital to lend to borrowers.
- To reduce risk: RMBSs can be used by financial institutions to reduce their risk by transferring the risk of the underlying mortgages to investors.
- To create new investment products: RMBSs can be used to create new investment products, such as exchange-traded funds (ETFs).
RMBSs are a complex financial product, and it is important to understand the risks associated with investing in RMBSs before making an investment.