RESIDENTIAL MORTGAGE BACKED SECURITIES IN INDIA

Residential Mortgage Backed Securities in India

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Residential Mortgage Backed Securities in India

Mortgage Backed Securities can be referred to as asset backed securities, where the flow of funds is supported by the regular payments towards the principal amount and payments of interests for a number of mortgage loans. Stanton (1995) has specified that prepayment in the mortgage contract can be viewed as a call option, and default in the mortgage contract can be viewed as a put option. Pricing for mortgage and mortgage-backed securities is complicated due to the stochastic and interdependent nature of prepayment and default risks. (Downing, Stanton and Wallace, 2001) While the typical mortgage-backed security appears to be just a collection of principal and interest cash flows, the ability of the owner of a mortgage to prepay or refinance at current rates has some monetary value, as the holder has the right but not the obligation to exercise this put option. From the viewpoint of the investor of the mortgage-backed security, this option can be considered as a liability, as its exercise would force the prepayment of the loan and an end to a portion of principal included in the investment (Schwartz & Torous, 1989: 375).

Advantages of Mortgage Backed Securities

The need of mortgage backed securities has been felt in the past few years by the mortgage originators to refill their investments. The mortgage backed securities aid in the development of new instruments to collect funds from the market, as the mortgage backed securities are usually very economic and more effective than the other financing instruments offered by the banks and the other forms of financing issued by the central government (Schorin & Gordon, 1995: 127). The mortgage backed securities mainly aid the companies dealing in these securities, to possess a better alternative than the assets owned by them. The financing companies will now be relieved of the costs of maintenance of the assets and other costs related to assets, which will reduce their overheads immensely and increase the profit ratio.

Special Feature of Mortgage Backed Securities

The commercial mortgage-backed securities are bought in exchange of offices, manufacturing units, land, multi-story buildings, and hotels, which means that they are gained against the personal or commercial holdings. The loans provided in lieu of the above mentioned collaterals can be extended beyond 5 years at fixed interest rates and may not provide the facility of paying off the loans before the specified tenure. These loans are also stretched over shorter periods like a maximum of 3 years with the facility of payment before time and are mostly accompanied by adjustable interest rates (Ronald & Sunderman, 1992: 381). Considering the need to promote the development of secondary market for Residential Mortgage Backed Securities (RMBS) in India, the RMBS Policy of NHB envisages to introduce specialized institutional measures for providing credit enhancements for promoting the development of secondary market for residential mortgages. It may be mentioned that the presence of specialized forms of credit enhancements such as Guarantees of ...