It stands for residential mortgage-backed security; a debt security that pays out based on payments from a pool of individual residential mortgages. It is asset-backed security (ABS) on which payments of principal and interest are made to the holders from the proceeds generated by a pool of residential mortgage. The underlying mortgages are posted as collateral to the benefit of the holders, securing the payment by the issuer of principal and interest on the securities.
An RMBS is structured in such a way as profits to investors are enhanced while risk is reduced to a minimum. However, if not structured properly, such securities can result in a great systemic risk that spill over an entire financial system.
Residential-mortgage-backed securities are popular in use by a special purpose vehicles (SPVs) as a component of a securitization process or structured products.
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