Mortage Backed Securities – Mortgage Backed Securities
The mortgaged-backed securities (MBS) are medium- and long-term securities, which are backed by assets ( asset-backed security ABS) whose cash flows are guaranteed by the principal and mortgage interest payments)
The Resident mortgage-backed securities (RMBS) are backed by residential real estate that has been mortgage loans to individuals.
The Commercial mortgage-backed securities (CMBS) are backed by commercial real estate or collective property (real estate property business, commercial or residential)
Securities are bonds, the remuneration of which is derived from the financial flows emanating from the underlying loan portfolio.
The simplest form of MBS is Mortgage Pass Through . Interest and principal payments from the underlying loan portfolio go directly to investors holding MBS.
When the underlying loans are fixed-rate mortgage loans subject to constant annuities, representing a repayment of the principal and the interest on the principal remaining due, the payments made to the holders of securities have the same characteristics.
Given the possibilities for borrowers to prepay, MBS often come with options.
Risk management and guarantee mechanisms
A liquidity account and an external guarantee may be provided to protect security holders from the risk of delay.
The risk of default may be the subject of guarantees from the ceding company and of a credit enhancement. The credit enhancement of a securitization transaction can result from the following techniques
– reserve fund,
– over collateralization
– structuring in subordinated tranches
Exchange rate and interest rate risks can be hedged by respectively exchange rate and rate swaps
The rating depends on the assessment of the risk of late payment or non-payment (partial or total) associated with the receivables and the establishment of guarantees, and in particular the level of the reserve fund.