Mortgage-Backed Securities (MBS): Global Examples & Indian Context

Introduction

Mortgage-backed securities (MBS) represent one of the most widely known categories of asset-backed instruments globally. They are created by pooling home loans or commercial property loans and issuing securities that pass through the repayments collected from borrowers.

Understanding what mortgage-backed securities are, their global examples, and how they relate to the Indian securitisation landscape helps investors interpret this important segment of structured finance.

This article explains the meaning of mortgage-backed securities, the types of MBS, how they are structured, and India’s evolving role in mortgage securitisation.

What Are Mortgage-Backed Securities (MBS)?

Mortgage-backed securities (MBS) are securities backed by a pool of mortgage loans.

These may include:

• home loans (residential mortgages)

• commercial property loans (commercial mortgages)

MBS represent claims on the cash flows generated by the underlying mortgage pool.

Globally, MBS form a major segment of the fixed-income market due to the scale of mortgage lending.

Mortgage-Backed Securities Meaning

In simple terms:

Mortgage-backed securities are asset-backed instruments supported by the repayments of a pool of mortgage loans.

The underlying loans generate monthly or periodic instalments, which are collected and distributed to MBS investors based on predefined payment structures.

How Mortgage-Backed Securities Are Structured

MBS transactions typically follow this structure:

1. Originator

Banks, housing finance companies (HFCs), or lenders issue mortgage loans.

2. Transfer to SPV

Loans are transferred to a Special Purpose Vehicle to create a bankruptcy-remote structure.

3. Pooling of Mortgages

A large number of mortgages are grouped together to diversify risk.

4. Issuance of Securities

The SPV issues MBS in tranches, depending on structure.

5. Cash Flow Distribution

Borrower payments (EMIs) flow to the SPV, which distributes the funds to MBS holders based on the waterfall structure.

6. Trustee Oversight

A trustee monitors adherence to the transaction's terms.

This structure separates mortgage assets from the originating institution.

Types of MBS: RMBS and CMBS

Mortgage-backed securities are typically classified into two categories:

1. RMBS (Residential Mortgage-Backed Securities)

Backed by home loans taken by individual borrowers.

2. CMBS (Commercial Mortgage-Backed Securities)

Backed by commercial loans related to offices, warehouses, retail spaces, etc.

These categories differ in terms of underlying assets, repayment characteristics, and structure.

Residential Mortgage-Backed Securities (RMBS)

RMBS are backed by individual home loans. Key characteristics include:

large number of small-ticket mortgages

relatively stable repayment patterns

amortising structures (loan balance reduces over time)

diversified borrower profiles

RMBS are widely issued in developed markets, where mortgage markets are large and securitisation is commonly used by lenders.

Commercial Mortgage-Backed Securities (CMBS)

CMBS are backed by commercial real estate loans. Characteristics include:

fewer but larger-sized loans

loans tied to income-generating properties (leased offices, warehouses, retail centres)

balloon or bullet repayment structures may exist depending on terms

sensitivity to commercial rental and occupancy conditions

CMBS represent a significant segment of global securitisation markets.

Global Examples of Mortgage-Backed Securities

Globally, MBS markets are highly developed in:

United States

The US has one of the largest MBS markets in the world, with agencies such as:

Ginnie Mae

Fannie Mae

Freddie Mac

These institutions play roles in guaranteeing or supporting mortgage securitisation.

Europe

European markets issue both RMBS and CMBS, backed by mortgages in the UK, Netherlands, Germany, and Spain.

Asia-Pacific

Countries like Japan, Australia, and South Korea have active RMBS markets.

These global examples demonstrate how securitisation frameworks differ across regions.

MBS in the Indian Context

India’s securitisation market includes mortgage-backed securities, although volumes differ from global levels.

Key features of India’s MBS landscape:

1. RMBS Presence

Housing finance companies (HFCs) and banks have issued RMBS backed by home loans.

2. CMBS Limited

Commercial mortgage-backed issuance is relatively small in India.

3. Regulatory Oversight

RBI guidelines govern securitisation structures, minimum holding periods, and risk retention.

4. Pool Characteristics

Indian RMBS pools often include:

salaried borrowers

fixed-rate or floating-rate home loans

amortising repayment structures

5. Investor Participation

Institutional investors participate in MBS transactions based on offer document disclosures.

India’s securitisation market continues to evolve with regulatory developments and growing lending activity.

Key Features of Mortgage-Backed Securities

MBS often include:

1. Diversified Asset Pool

Large number of mortgages contribute to diversification.

2. Tranching Structure

Securities may be issued in senior or subordinated tranches.

3. Amortising Cash Flows

Mortgage loans reduce over time based on EMI payments.

4. Credit Enhancement

Over-collateralisation, cash reserves, or guarantees (depending on structure).

5. Waterfall Mechanism

Cash flows are distributed in a defined sequence.

These features vary by structure and are disclosed in the offer documents.

Factors Investors May Evaluate

When analysing RMBS or CMBS, investors may consider:

1. Underlying Loan Pool Quality

Loan-to-value ratios, borrower credit profiles, geographic distribution.

2. Originator Performance

Track record in mortgage origination and collection.

3. Amortisation vs Balloon Structures

Cash-flow behaviour differs based on repayment type.

4. Prepayment Behaviour

Borrowers may prepay mortgages, affecting cash-flow timing.

**5. Credit Enhancement

Structure-specific measures handling risk.

6. Tranche Characteristics

Each tranche has different structural features.

Understanding these aspects helps investors interpret MBS structures effectively.

Risks Associated With MBS

Mortgage-backed securities carry risks such as:

1. Credit Risk

Related to borrower repayment behaviour.

2. Prepayment Risk

Early repayment alters cash flows.

3. Market Risk

Economic conditions can influence mortgage payments.

4. Liquidity Risk

Market depth may vary across MBS categories.

5. Structural Risk

Depends on tranching and credit enhancement.

These risks should be understood in the context of offer document disclosures.

MBS and Yield-Related Analysis

Yield estimation for MBS involves:

amortising cash flows

prepayment assumptions

tranche-specific price inputs

expected repayment schedules

Unlike plain-vanilla bonds, MBS yields may vary due to shifting principal balances and prepayment patterns.

Analytical tools help interpret these characteristics but do not predict outcomes.

How BondScanner Helps Investors Explore MBS Characteristics

BondScanner provides:

issuer details

pool characteristics (when available)

coupon terms

amortisation details

credit ratings

maturity structures

These help investors explore and compare MBS features based on disclosed information and support independent research.

Conclusion

Mortgage-backed securities (MBS) represent a major segment of global securitisation markets. They transform mortgage loans—either residential or commercial—into tradable instruments backed by borrower repayments.

By understanding what mortgage-backed securities are, how RMBS and CMBS differ, and the Indian securitisation context, investors can analyse these structures more effectively using available information.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.