The Capital Markets

CHAPTER 19Non‐Agency Residential Mortgage‐Backed Securities (RMBSs)

Daniel I. Castro, Jr.

RMBS OVERVIEW

Residential mortgage‐backed securities (RMBSs) are bonds where the payment stream to the investor is funded by the payment of principal and interest on an underlying pool of residential mortgage loans. RMBSs generally fall into two categories: agency MBSs issued by government‐sponsored enterprises (GSEs) such as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), or by the government agency known as Government National Mortgage Association (Ginnie Mae); and non‐agency or private‐label MBSs sponsored by private entities without government support. Ginnie Mae is backed by the full faith and credit of the U.S. government while Fannie Mae and Freddie Mac also provide certain guarantees and have special authority to borrow from the U.S. Treasury. The GSEs' and Ginnie Mae's government support mitigates their credit risk and provides exceptionally strong liquidity. This chapter focuses on non‐agency RMBSs.

THE CREATION OF RMBS

The RMBS securitization process starts with the origination of mortgage loans. Similar mortgage loans—the collateral—are then aggregated into mortgage pools. The trust raises funds to pay for the loans by issuing certificates backed by the assets held in the trust. A typical RMBS transaction involves the creation and deposit of the pooled mortgage loans into an investment vehicle with an independent ...