What is RMBS?
RMBS stands for Residential Mortgage Based Securities . Whenever a person takes a mortgage (any loan with real estate as collateral) and the lender gives money upfront in return for the promise of getting back the loaned amount along with interest over time. The lender can turn around and sell a group of such loan assets (future cashflows) to a third party, usually an investment firm. The lender benefits because his risk is minimized or completely removed as the investment firm has to deal with the consequences of any potential default.
Investors who end up taking on risk get rewarded if people keep paying their mortgages (principal + interest). The moral hazard is that banks, without doing thorough research on borrowers, keep giving out loans and sell them to investment firms who have to thus bear losses due to the negligence of banks. This is exactly what happened during the Global Financial Crisis in 2008.
History of Securitisation in India
The accelerating trend of the securitization market at the beginning of this century faced a major threat due to the subprime crisis. The ABS (Asset Backed Securities) volume dipped by 60%. On the other hand, the CDO (Collateralized Debt Obligation) market was at an all-time high, thus increasing its share in the Indian market to 70%.
Post the subprime crisis in the US, RBI issued a revised guideline to overcome the loopholes in the market. These guidelines were very rigid concerning the originators and SPVs. As a result of these factors, the Indian Securitisation market which reached a high by 2008 dwindled by March 2014.
RMBS in India
In a strategic move to propel the housing finance sector, RMBS Development Company Limited (RDCL) has been established by the National Housing Bank (NHB) in consultation with RBI. RDCL is expected to start operations in FY25.
National Housing Bank with 39% and LIC with 10% have the largest holding in RDCL. HDFC Bank , ICICI Bank and Bajaj Finance have acquired a 7% stake each in RDCL.
Tata Housing, Hero Housing, Shriram Housing and Grihum Housing Finance also own a part of RDCL. Others who have a stake in RDCL are IIFL Securities and Aditya Birla Housing Finance.
As per ICRAâs estimate, the share of RMBS would be modest, at less than 15% of the overall Rs. 1 trillion market in FY2024 (i.e. mortgage-backed securitisation (MBS) and asset-backed securitisation (ABS) combined, where securitisation is done through the issuance of PTCs).
The collaboration of RDCL has pledged âš500 crore to revitalise the RMBS market.
CMBS in India
In 2014, DLF launched Indiaâs first Commercial Mortgage Based Security (CMBS) by securitizing the lease rentals on two malls in Vasant Kunj in Delhi, DLF Emporio and DLF Promenade. DLF had said that it would receive Rs. 800 cr. for 7.5 years, where interest is paid through rents received from property tenants.
CDO, CLO and CMO in India
ICICI Bank launched Indiaâs first multi-tranched CDO in 2002 called the Indian Corporate Collateralized Debt Obligation Fund. This fund offered investors a fixed-income product with a higher return than a corporate bond.
Collateralized loan obligations (CLOs) have also been issued in India, primarily by NBFCs. CLOs can help improve risk participation in the industry and boost credit growth for lower-rated entities.
Collateralized mortgage obligations (CMOs) are usually issued as Real Estate Mortgage Investment Conduits (REMICs). REMICs are structures that issue multiclass mortgage-backed securities with tax and accounting benefits for investors and issuers. The terms âCMOâ and âREMICâ are often used interchangeably.
Summary
In the RMBS space, volumes have improved to ~Rs 10,000 crore in 9M FY2024 against ~Rs 6,000 crore in FY2023. The formation of RDCL could help in widening the investor base as they have traditionally been wary of investing in these securities due to its long tenure, prepayment risks, interest rate risks and absence of a secondary market. The other major advantage of RMBS is it not only provides a distinct funding profile to HFCs but also unlocks additional capital from diverse investor groups including Insurance companies, retirement funds, etc. The presence of an entity such as RDCL would reduce some of the investor apprehensions and most likely kickstart a growth story in the MBS market.
