Tuesday 03 December 2013 by FIIG Research Legacy

RMBS produce stellar returns for FIIG Investors

FIIG has been an active participant in the Residential Mortgage Backed Securities (RMBS) market over the last few years

RMBS are an extremely common mechanism for banks and non banks to fund the home loans given to homeowners and property investors alike. FIIG analyses many different RMBS periodically available in the fixed income market. Post the GFC, a number of RMBS were sold by distressed sellers at cheap prices, however the underlying investment features of the RMBS remained fundamentally sound. FIIG analyses these RMBS looking at some of the key features of the home loans making up the RMBS pool:

  • loan to value ratios
  • seasoning of the home loans
  • the number of loans in arrears
  • historical losses generated by the RMBS pool  
  • the amount of excess cashflow generated

FIIG further assesses the structure of the RMBS transactions. One particular RMBS feature is whether, like other fixed income investments, the RMBS will be called.

The Sapphire 2005-2 RMBS transaction which FIIG sourced for investors had various RMBS tranches that paid income of approximately BBSW plus 2% to 5% however, as these RMBS have been called at par, investors have enjoyed significant windfalls given they purchased the RMBS at a discount. Depending upon when investors purchased the RMBS, investor returns have ranged between 9% and 13%. When investors purchased these Sapphire RMBS, they were symptomatic of quality securities trading at heavily discounted prices. It seems this particular Sapphire opportunity has now past, however FIIG is always on the look out!

Key terms

Residential mortgage backed security (RMBS)

A type of asset backed security or debt obligation that is secured by residential property. These loans are assembled together to form pooled investments. Instead of paying investors fixed coupons and principal, it pays out the cashflows from the pool of mortgages. The bank acts as a middleman between the home buyer and the investment markets.