PROJECT COMPLETION CERTIFICATE

This is to certify that project titled Study of Residential Mortgage Backed Securities
(RMBS) in India & its rating methodology is successfully done by Mr. Prathamesh
Khanolkar in partial fulfilment of his two years full time course Post Graduation Diploma in
Management recognized by AICTE through the Print. L. N. Welingkar Institute of
Management Development & Research, Matunga, Mumbai.

This project in general is done under my guidance.

___________________________
(Signature of Faculty Guide)

Name: ______________________

Date: ______________________

ACKNOWLEDGEMENT
1 | Page

This research was supported by CRISIL. I thank the company and my mentor Vinaya
Bahadkar who provided insight and expertise that greatly assisted the research, although they
may not agree with all of the interpretations/conclusions of this paper.
I further thank my faculty mentor, Prof. Suyash Bhatt for assistance and for his insights that
greatly improved the project report.

INDEX
Sr. No.

Topic

Page No.
2 | Page

1.
2.
3.
4.
5.
6.

Executive Summary
Literature Review
Research Methodology
Securitization
Risks involved
Financial analysis of RMBS

3
4
9
10
12
13

7.
8.
9.

RMBS types
Credit enhancement
RMBS Archetypical pool

15
16
20

10.
11.

Conclusion
Bibliogtaphy

21
22

3 | Page

EXECUTIVE SUMMARY
As a final year student in Post Graduate Diploma in Retail (Finance) course, I developed
interest in the field of structured finance and the following report is step one towards
pursuing this interest into more depths.
The project covers in detail about the Residential mortgage backed securities (RMBS) market
in India and worldwide, its further scope in India, its rating methodology and comparison
with an equity instrument REITs.
The first part of the project covers the pre & post-2008 RMBS market worldwide and in
India. Thereafter, causes and effects of sub-prime mortgage crisis etc. have been explained in
brief.
The project then covers two different parts:
1. Rating methodology of RMBS securities covering broadly the types of risks involved, and
then delving into detail about the most significant risk- the credit risk. We take up a sample
case study to identify the parameters.
2. The comparison of RMBS with REITs as a method of investment covers the comparison of
their structures, their scope in India and advantages and disadvantages of both.
The purpose of the project report is to study in depth about RMBS with the help of one of the
2 prominent rating agencies in India- CRISIL.
The final part of the project highlights this purpose and gives recommendations on the where
focus should lie in the coming future to reap maximum benefits of RMBS.

4 | Page

LITERATURE REVIEW
Article 1:
MBS with an impact: Mortgage-backed securitisation for affordable housing finance by
Sreya Ray and VaibhavAnand, IFMR Capital
This chapter was originally published in:THE EUROMONEY SECURITISATION &
STRUCTURED FINANCE HANDBOOK 2014/15
There is a shortage of nearly 18 million homes in urban areas and 43 million homes in rural
areas in India. Approx. 87% crunch is faced by economically weaker sections of society.
AHFCs (Affordable housing finance companies) provide mortgages and secured credit to
these sections. The borrowers are a mix of self-employed entrepreneurs, blue-collar workers
etc. It is hard for them to provide income history, tax filings and ownership of assets. AHFCs
compensate for the lack of this documentation by way of a comprehensive field-based credit
evaluation process and physical verification methods. AHFCs register themselves with the
National Housing Bank (NHB). In March 2014, IFMR Capital securitised the first pool which
consisted small-ticket housing loans originated from the low-income segment by an AHFC.
The transaction was named Hebros AHL IFMR Capital 2014 and was given a rating by
ICRA. The senior (A1) tranche was rated BBB+ and the junior (A2) tranche was rated BB+.
The senior tranche was subscribed by a large Indian private sector bank, while IFMR Capital,
purchased the junior tranche. Junior (A2) tranche was rated BB+. The Credit riskwas
managed via the following: no loans with arrears as on the transaction closing date were
included, all loans had a minimum seasoning of 12 repayments.

Loans with very high LTV and very high IIR were removed. Further, as per observations,
borrowers may miss payments but are less likely to default because: equity by borrower in
the property is considerable weighted average LTV on the pool is very low at about 56%,
homes are typically primary residences which are self-occupied and in India there is a social
and status value attached to owned homes. Most of these borrowers consider their homes
more than an economic asset and they make sure to pay up even during financial distress
times. The first RMBS for an AHFC, arranged, structured and invested in by IFMR Capital,
is a promising step in this direction.

5 | Page

Article 2:
ICRAs Rating Methodology for RMBS Transactions. This article highlights the Risks
involved in RMBS securitization
The credit ratings are decided on 2 main parameters. The first one being weighted average
foreclosure frequency and the second being weighted average loss severity. These two help to
mitigate the most prominent risk in an RMBS transaction- credit risk. Credit Risk as we know
is the inability of a borrower to repay the loan. So what is done basically is using historical
records the highest probability of a loan defaulting out of n no. of cases is determined and is
applied. On finding that similarly, in case of a default, if the collateral is to be sold off, its loss
severity is calculated ie what will be its value in case of a distress sale. So if out of a pool of
10 suppose 1 defaults, and the distress sale fetches only 50% of the loan amount. It means 5%
is the total transaction value lost. The worst case scenario is calculated in this way. Now the
total percentage calculated is the credit risk to be mitigated through credit enhancements. If
we can enhance the credit enough to cover the worst case scenario it is given the highest
rating, ie AAA
The other prominent risks areCounterparty Risk: The other parties to the transaction, like the hedge arrangement
provider, servicer bank, arranging back etc., to meet their obligations.
Interest Rate Risk: Risk due to change in interest rates
Exchange Rate Risk: Risk due to fluctuations in foreign exchange rate
Commingling Risk: Risk arising due to mixing of cash flows of two different pools by the
servicer bank.
Prepayment Risk: Risk arising due to early foreclosure by the customer.
Legal / regulatory / tax Risk:
Obstacles to RMBS in India like lack of secondary market liquidity, high stamp duty etc also
needs to be mitigated.
Accordingly, the highest rating is fetched, if the transaction can handle the worst vase
scenario.

6 | Page

Article 3:
DLF pushes ahead with REIT listing plans.
http://www.livemint.com/Companies/7puOVQsJ3sJ4dM6k2kD7SO/DLF-pushes-ahead-withREIT-listing-plans.html. This chapter was originally published in liveMint on Tue, Mar 01
2016.
DLF will launch REITs worth up Rs.6, 000 crore in two tranches over the next two years.
REITs are listed entities that are analogous with mutual funds. Here REITs will invest in
completed real estate projects, thus freeing money for the developer and the cash flow
income will be earned by investors. ROI is either through value appreciation or rental income
generated from commercial assets.
REITs main issue had been DDT. Dividend distribution tax of 17% on REITs generated
income had kept away investments. Primary reason being unlike listed companies which can
use the income to put it back into business, REITs has to give 90% of its taxable income to
dividend holders. This primarily wipes out the whole idea of earning returns on REITs. Union
budget 2016-17 proposes to exempt REITs from DDT, removing the primary obstacle.
Approx 229 million sq. ft of office is REIT-compliant. Thus, changes to the REITs in the
current budget will give a boost to affordable housing plan- Housing for all by 2022.
Liquidity crunch in the housing market likely will get resolved by REITs. Retail investors
will get a better option to invest as real estate is considered a safe option in India. Listing of
REITs and proper analysis based on the red herring prospectus of these REITs will encourage
the retail investor to invest in this market.

7 | Page

Article 4:Cheers for home buyers, LokSabha clears Real Estate (Regulation and
Development) bill
Link: http://realty.economictimes.indiatimes.com/news/regulatory/cheers-for-homebuyers-lok-sabha-clears-real-estate-regulation-and-development-bill/51412340

SWOT of Real Estate Regulation bill

Strengths- 1. 70% of money gets transferred

to an escrow account, meaning money cannot
be siphoned off to other projects
2. Project delays attract penalty payable to
the buyer, at ROI equal to his/her home loan
3. RERA to compulsorily dispose off cases
within 60 days.
4. Flats to be sold on the basis of carpet area
and not super built-up area

Opportunities- 1. This bill will be extremely

harsh on many bogus builders who had come
up, taking advantage of loopholes in this
industry, thus eliminating many trouble
makers.
2. Foreign investment to increase in
affordable housing and other real estate
projects, thus making Housing for all by
2022 a reality
3. Overall investment bound to increase in
real estate, lifting the real estate market.
4. Other industries like infrastructure will
also attract FDI if some big projects are
executed in a proper way.
Article 5:

Weaknesses- 1. 30% of money still with the

builder which can be used to buy other land
parcels or on other projects.
2. RERAs decision can be challenged in the
higher courts of authority thus leading to
eventual delays and harassment for buyer.
3. None of the builders concerns have been
addressed, esp the one due to delays in
getting different approvals and permissions,
making this bill a pro-buyer one only.
4. Flats to become costlier as the builder will
try to pass on all the added costs to the buyer
to protect its balance sheet
5. Does not shed any light on the existing
cases
Threats- 1. Govt construction agencies will
eat up the market share of many small to
mid-sized builders, as part of
permissions/approvals becomes hassle-free
for them.
2. Barriers to entry increased as the real
estate industry will now need a strong
balance sheet to pull off a successful project,
thus driving own entrepreneurship.

CM DevendraFadnavis fast-tracks affordable housing through SRA

Link: http://indianexpress.com/article/cities/mumbai/cm-devendra-fadnavis-fast-tracksaffordable-housing-through-sra/

8 | Page

Affordable housing mandate has been handed over to SRA which has to pump in Rs. 500
crore into Shiv Shahi Punarvasan Prakalp project. Though SRA has been in Maharashtra for
10 years trying to rehabilitate slum dwellers, its major fault was in asking the developer to
take the consent of 70% dwellers. This took a long time, as the vested interests of developers
lead to many deadlocks with the slum developers.
On private land, the redevelopment project plan would be decided by the owner within a span
of 3 months. On semi-government and government land, the period of processing the project
would not exceed six months.
SRA would then step in, if the owner fails to submit a process. Tenders would be beckoned
for the project. Secret ballot system will ensure that the tenants get to choose the right
developer.
The above arrangements will expedite the process of acquiring the land which has been the
bane of affordable housing projects in Mumbai. As parcels of land in Mumbai are
diminishing, this appears to be the only way in order to achieve the Housing for All.
Government doesnt own enough land to attract large investors. The Canada Pension Plan
investment board which wanted to invest here is not getting huge land parcel enough to go
ahead with its project. Hence the call to SRA which is overdue on its promises. The chief
minister also stressed on cluster development that would ensure infrastructure and related
amenities.
SRA officials are to enforce meticulous biometric system to ascertain the eligibility of every
tenant who would be beneficiary of the scheme. This is to ensure that no dubious recipient
gets a benefit of the offer and also the correct one votes for the developer.

RESEARCH METHODOLOGY

The following report involves qualitative as well quantitative data collection tools. The
qualitative data of the presence of RMBS worldwide and in India, rating methodology,
9 | Page

structures of both RMBS and REITs have been collected through secondary research. Most
parts of quantitative data such as growth figures of the said sector in the same have also been
through approved secondary sources.

SECURITIZATION
Securitization is the process of converting an illiquid asset, into a liquid asset.

10 | P a g e

A typical example of securitization is a residential mortgage-backed security (RMBS), which

is a type of asset-backed security that is secured by a collection of mortgages. The process
works as follows:
First, a regulated and authorized financial institution originates numerous mortgages, which
are secured by claims against the various properties the mortgagors purchase. Then, all of the
individual mortgages are bundled together into a mortgage pool, which is held in trust as the
collateral for an RMBS. The RMBS can be issued by a third-party financial company, such a
large investment banking firm, or by the same bank that originated the mortgages in the first
place. Mortgage-backed securities are also issued by aggregators such as Fannie
Mae or Freddie Mac.
Regardless, the result is the same: a new security is created, backed up by the claims against
the mortgagors' assets. This security can be sold to participants in the secondary mortgage
market. This market is extremely large, providing a significant amount of liquidity to the
group of mortgages, which otherwise would have been quite illiquid on their own.
Furthermore, at the time the RMBS is being created, the issuer will often choose to break the
mortgage pool into a number of different parts, referred to as tranches. These tranches can be
structured in virtually any way the issuer sees fit, allowing the issuer to tailor a single RMBS
for a variety of risk tolerances. Pension funds will typically invest in high-credit rated
mortgage-backed securities, while hedge funds will seek higher returns by investing in those
with low credit ratings.
Every securitization instrument generally shares 3 common themes:
1. The source of payment on a securitization instrument generally is the cash flow,
due to amortization or otherwise, from a pool of assets (often financial), rather
than from the ongoing operations of a corporate entity.
2. The securitization instrument and related documents allocate the cash flows from
the underlying assets in a specific manner depending on investor preference.
3. The risk of non-payment on a securitization instrument is intended to be limited to
the credit risk of the asset pool and distinct from the credits associated with the
originator of the assets.
Typically in an RMBS transaction following are the entities1. Originator- The party that originated, and typically underwrote the assets.
2. Seller: The party transferring/selling the assets to the SPV (typically the originator).
3. Servicer: The party who administers and services the asset portfolio (often the
originator of the assets).
11 | P a g e

4. Issuing trustee: A party who takes legal title to specified assets under the terms of a
trust deed.
5. SPV Manager: A party who administers the securitization program and which either
administers the securitized assets or oversees their administration by others.
6. Registrar: The party who maintains the register of investors and their respective
entitlements.
7. Paying agent: An agent of the issuer of debt who effects payments of principal and
interest to investors.
8. Support Provider: A counterparty that provides credit, liquidity or cash flow support
to a transaction.
9. Arranger: The manager who arranges the securitization debt offering and manages the
distribution and allocations of bonds to investors. The lead manager is often assisted
in that process by co-managers.
10. Underwriter: Generally, a party who agrees to purchase any unsold securities at a
predetermined price.
11. Dealer: A financial instruments trader.

Investors

RMBS
Bonds

Investors

Subscription
proceeds

int&princ
payments
Credit

SPV
Sale of

Enhancement

Liquidity Enhancement

SPV

Purchase
considerations

assets

12 | P a g e

Collection
of assets
Originator
Orginator

RISKS INVOLVED
Risk

Credit
Risk

Influencing
factors

Indicators

Risk Mitigant

Borrower
profile

Age, nature of employment, level of

indebtedness, Credit Bureau Risk Score

Careful selection of pool based on portfolio

observations, typical filtering criteria being-

Underlying asset
or collateral

Inherent nature of the asset class

earning asset or consumption asset

Lending norms

Minimum seasoning

Volatility of the secondary market

Overdue status and payment

track record

collateral value

Maximum LTV / loan tenure

Loan servicing capacity - Fixed

Obligation to Income Ratio (FOIR)

Regional spread
Credit Enhancement

Extent of borrowers equity - Loan to

Value Ratio
Macro-economic
scenario
Inadequate or
improper
Documentation
Legal
Risk

Economic growth rate, inflation, interest

rates, job stability, business prospects,
consumer confidence
Appropriate documentation, together with
a legal opinion to establish that
There is a true sale of the
receivables in question
Originators creditors will not have a
claim in the receivables in the event
of Originators bankruptcy
Adequate stamp duty has been

13 | P a g e

paid on the transaction documents

Servicer

Commingling risk - in the event of

bankruptcy of the Servicer, risk of pool
collections being clubbed with the
Servicers other assets, rather than being
made available to the Investor

Counterp
arty Risk
Other
Counterparties
-Bank/ Trustee/
counterparty/any
other facility
provider

Interest
Rate Risk

Incapability of servicer to fulfill its duty,

leading to adverse impact on pool
collections

Mismatch in
underlying loan
pool and PTC
interest rate

Inability of the counterparties to perform

their respective duties leading to a
shortfall in payout to Investor

Compression in EIS in case if the two

(pool yield and PTC yield) move
adversely

Selection of servicer with high credit

quality
Provision for restriction in commingling of
funds in the event of deterioration in
Servicers credit quality
Provision for alternate servicer in case of
severe deterioration in Servicers credit
quality of initial Servicer
Selection of counterparties with good
credit quality, track record and experience
Provision for replacement of the counter

Provision of credit enhancement

Linking the PTC yield to the pool interest
rate
Using Interest Rate Swap

Financial Analysis of RMBS

We calculate the level of credit enhancement; we believe to be consistent with different rating
categories. This calculation is derived through credit, and in most cases, a cash flow analysis.
These analyses are based on rating scenarios and rating assumptions commensurate, in each
case, with the relevant rating category.
Credit Analysis- The primary aim of the credit analysis is to determine, for each rated bond,
an opinion on the likelihood of that bond paying interest and principal when due by
subjecting the underlying assets to economic stress scenarios that are consistent with various
rating levels.
To develop the appropriate loss assumptions for each rating category, stress scenarios are
applied. During the credit analysis of a particular pool, different scenarios like- AAA
scenario or BBB scenario will be applied. The scenarios are made up of a series of
assumptions about defaults and recoveries, which when applied to the pool, result in an
overall level of assumed loss for a particular rating category for that particular pool.
Assumptions are not facts but reflect the opinion as to what levels of stress are appropriate for
a given rating category. Assumptions for a particular asset class may be modified for a
specific transaction by the rating committee based on the specific circumstances of the pool
being analyzeD

14 | P a g e

Two key assumptions that are often used when calculating the overall level of assumed loss
on a pool are the weighted average foreclosure frequency and the weighted average loss
severity. WAFF reflects how many assets in the securitized pool are likely to default at a
given rating stress. WALS reflect the average recovery for each asset post default for a given
category. By multiplying WAFF by the WALS, the assumed overall loss on the pool at a
given rating, and therefore the level of credit enhancement is arrived , which will be
commensurate with a given rating level.
Following example to illustrate concept:
For a pool of 2000 mortgages, each with a principal balance of Rs. 1 million, the asset
analysis indicates that 50% of the mortgages have a LTV of 75% ( that is, the bank lent 75%
of the value of the house, the other 25% being funded by the borrower). This means at
funding, each Rs 1 million loan was made to purchase a house valued at Rs. 1.3 million. The
loans in the remaining half of the pool have a 90% LTV meaning that at funding, each of
these Rs. 1 million Loans were made to purchase a house valued at Rs. 1.1 million.
The historical data analysis shows that, over the last 30 years, loans with a 75% LTV have
defaulted 3% of the time and those with a 90% LTV have defaulted 4.5% of the time. Based
on this data and other analysis, we conclude that the appropriate level of AAA stressed
default; pursuant to this its criteria should be 20% for the loans with a 75% LTV and 30% for
the loans with a 90% LTV. In other words, in a AAA scenario, we expect that 20% of the
borrowed 75% of their homes purchase price would default, and 30% of those who borrowed
90% of their homes purchase price would default.
Therefore, in the AAA scenario, we expect 200 of the 1000 75% LTV mortgages to default
and 300 of the 1000 90% LTV mortgages to default. This is a total AAA stressed default of
500 out of 2000, or 25%. The AAA WAFF for this pool is 25%.
However, because these loans are secured, the collateral(houses) of the defaulting borrowers
will be put up for sale and there will likely be some recoveries which can be applied to the
loan balances. The historical data shows that the worst house price decline which was in
1980s was 15%. Based on this data and other analysis, we conclude that in a AAA
scenario, the stressed house price decline is 50%. In other words, the value of the houses will
be halved.
Applying the AAA assumption regarding house price declines, we believe that Rs. 1.3
million house would likely be sold for half its value- Rs. 6, 50,000. The loss on the Rs. 1
million loan would therefore be Rs. 1million minus Rs. 6, 50,000, or Rs. 3, 50,000. That is
35% loss severity. Applying the same assumption, Rs. 1.1 million house would likely to be
sold for Rs. 5, 50,000. The loss on Rs. 1 million loan would therefore be Rs. 4, 50,000. This
is a 45% loss severity. Averaging the two loss severities, the AAA weighted average loss
severity (WALS) for the pool is 40% .

15 | P a g e

In sum, with a AAA WAFF of 25% and a AAA WALS of 40%, we would expect that in
a AAA scenario, a quarter of loans would default and there would be a loss, on average of
40 paise for every rupee of loan principal. Accordingly the stressed loss level would be 25%
x 40%= 10%.
In rupee terms, we would expect Rs. 500 million of the Rs. 2 billion pool to default but that
there would be recoveries of 60% on average after selling houses, leaving an assumed loss of
Rs. 200 million.

RMBS types
1. Prime mortgages- Prime is a classification of borrowers, rates or holdings in the
lending market that are considered to be of high quality. This classification is placed
on those borrowers that are deemed to be the most credit-worthy and the prime rate is
the rate that a lender will lend to its high quality borrowers.

2. Subprime mortgages (home equity loans)-A subprime mortgage is a type of mortgage

that is normally made out to borrowers with lower credit ratings. As a result of the
borrower's lowered credit rating, a conventional mortgage is not offered because the
lender views the borrower as having a larger-than-average risk of defaulting on the
loan. Lending institutions often charge interest on subprimemortgages at a rate that is
higher than a conventional mortgage in order to compensate themselves for carrying
more risk.

3. High LTV mortgages- High loan-to-value mortgages are available if you have a
limited amount of money available for a deposit on a house. These mortgages allow
you to borrow a higher percentage of the propertys value and the amount that you
borrow is known as the loan to value, often shortened to LTV. For example if you if
16 | P a g e

you wanted to buy a property worth INR 25,00,000 and you put down a INR
2,50,000 margin, the loan to value of your mortgage would be 90 per cent. In the
current economic climate anything over 80 per cent would be considered high LTV,
but many mortgage lenders set their limits even lower than that.

4. Home improvement loans- Typically, a short-term loan advanced for improvements in

a residential property, such as additions and alterations, maintenance and repair,
or replacement of structural parts.

Credit Enhancement
External credit enhancement mechanisms1. Letter of Credit - A letter issued by a bank to another bank (especially one in a
different country) to serve as a guarantee for payments made to a specified person
under specified conditions.
2. Bond insurance policies- Bond insurance (also known as "financial guaranty
insurance") is a type of insurance whereby an insurance company guarantees
scheduled payments of interest and principal on a bond or other security in the event
of a payment default by the issuer of the bond or security. As compensation for its
insurance, the insurer is paid a premium (as a lump sum or in installments) by the
issuer or owner of the security to be insured. Bond insurance is a form of "credit
enhancement" that generally results in the rating of the insured security being the
higher of (i) the claims-paying rating of the insurer and (ii) the rating the bond would
have without insurance (also known as the underlying or shadow rating).
17 | P a g e

3. Bank Guarantee - A bank guarantee is a promise from a bank or other lending

institution that if a particular borrower defaults on a loan, the bank will cover the loss.
Note that a bank guarantee is not the same as a letter of credit.

Internal credit enhancement mechanisms1. Overcollateralization

Assets

Liabilities

Senior AAA rated class

AA rated class
Assets

A rated class
BBB rated class
BB rated class
B rated class

Overcollateralization

Equity

Surplus underlying collateral, sufficient to cover a certain level of expected/un

expected defaults.

2. SubordinationIn its simplest form, two classes of securities:

-

Senior class is highly rated

Subordinated class provides loss coverage for senior class

18 | P a g e

Priority of payments, availability of excess interest, reserve funds, liquidity

facilities and other elements all affect sizing of subordinated classes.

Assets

Liabilities

Senior AAA rated class

AA rated class
Assets

A rated class
BBB rated class

Subordinated cls.

BB rated class
B rated class

Rating

Original Principal
balance

% of Transaction

AAA

INR 94000000

94%

AA

27500000

2.75%

16000000

1.6%

BBB

7500000

0.75%

BB

4000000

0.4%

2500000

0.25%

NR

2500000

0.25%

TOTAL

1000000000

100%

Payment allocation-

19 | P a g e

Sequential- Pay tranche with the highest rating first until it is fully paid off, Then
pay tranche with the next highest rating until it is fully paid off.
Credit enhancement (in the form of subordination) for the senior class builds in
percentage terms but remains constant in rupee terms.
Pro-rata- Pay senior and subordinate classes according to their original
percentages
Credit enhancement ( in the form of subordination) for the senior class remain
unchanged in % terms but declines in dollar terms.
Turbo-Use excess spread to retire the notes. Note balance declines faster than
collateral balance.
Builds credit enhancement for senior class on a percentage basis against the
current pool balance.

3. Excess spread- Interest on underlying receivables typically exceeds blended interest

rate on debt.
Potential alternatives:
Pay through to bottom of waterfall
Hold in reserve fund/increase to build over collateralization
Pay down( accelerate) securities- commonly called turbo.
Excess spread = Gross interest collections- fees- interest owned on securities
4. Reserve fund- A funded account available for use by an SPE for one or more specified
purposes. A reserve account is often used as a form of credit enhancement. It is built
up using the excess cash flows.

Payment allocation examples

Pro- rata example

20 | P a g e

Facts

Pro Rata Payment

Class A (89%)

Rs.89

- Class A receives

Rs 8.9

Class B (9%)

Rs. 9

-Class B receives

Rs. 0.9

Class C (2%)

Rs. 2

-Class C receives

Rs. 0.2

Ending balance and

% of receivables
At closing
receivables

Rs. 100

- Class A

Rs. 80.8 89%

- Month 1 principal
received

Rs. 10

- Class B

Rs. 8.1

9%

-Month 1 excess
spread

Rs. 1

- Class C

Rs. 1.8

2%

- Month 1 end
balance

Rs. 90

- Totals

Rs.90

100%

-C/E for Class A:

Rs. 9.9

11%

Excess spread for

Re. 1 is released

21 | P a g e

Sequential example

Facts

Pro Rata Payment

Class A (89%)

Rs.89

- Class A receives

Rs. 10

Class B (9%)

Rs. 9

-Class B receives

Rs. 0.9

Class C (2%)

Rs. 2

-Class C receives

Rs. 0.2

Ending balance and

% of receivables
At closing
receivables

Rs. 100

- Class A

Rs. 79

87.8 %

- Month 1 principal
received

Rs. 10

- Class B

Rs. 9

10 %

-Month 1 excess
spread

Rs. 1

- Class C

Rs. 2

2.2 %

- Month 1 end
balance

Rs. 90

- Totals

Rs.90

100%

-C/E for Class A:

Rs. 11

12.2%

Excess spread for

Re. 1 is released

Turbo example

22 | P a g e

Facts

Pro Rata Payment

Class A (89%)

Rs.89

- Class A receives

Rs. 11

Class B (9%)

Rs. 9

-Class B receives

Rs. 0

Class C (2%)

Rs. 2

-Class C receives

Rs. 0

Ending balance and

% of receivables
At closing
receivables

Rs. 100

- Class A

Rs. 78

86.7%

- Month 1 principal
received

Rs. 10

- Class B

Rs. 9

10 %

-Month 1 excess
spread

Rs. 1

- Class C

Rs. 2

2.2 %

- Month 1 end
balance

Rs. 90

- Totals

Rs.89

98.9%

-C/E for Class A:

Rs. 12

13.3%

Turbo creates OC
of Re. 1 or 1.1%
RMBS Archetypical Pool
How are WAFF & WALS arrived at?
Factors which can lead to a default are all penalised to varying degrees as per the loan
portfolio. Factors such as Loan to value ratio, arrears, seasoning, refinancing, first time buy,
second home buy, CIBIL score, DSCR ratio, valuation of home, mortgage value decline,
originators underwriting, default considerations of bank, court judgements , delinquencies,
first or second lien, prepayments, geographic concentration, fixed/float loans, etc are some of
the loan level characteristics considered
After penalising to varying degrees, the base case historical probability of default and loss
severity are multiplied by these to arrive at the possible credit coverage that will be required
to cover these. Credit enhancement discussed in the above cases is calculated and seen
whether it covers the possible losses or not. Accordingly decision is made to upgrade,
downgrade or maintain the rating. This is done peridocally.

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In 2014, India's RMBS issuance increased by 75% to INR53 billion (US$831.5 million), As
the funding needs of India's mortgage lenders grow in step with the government's vision to
provide 'housing for all', the RMBS market has scope to develop into a larger funding source,
particularly for niche lenders focused on affordable housing.
Moody's expects securitization will play a bigger role in funding these mortgages,
particularly as specialist housing finance companies which account for 37% of India's
mortgage lending have limited access to cheap deposits.
Housing finance companies are expected to grow their loan books by 20%-22% in 2015 and
will need as much as INR2 trillion (US$31.4 billion) in incremental funding .
But some key obstacles remain for the sector's development, says Moody's. New tax rules
have led to lower post-tax returns for bank investors in RMBS, while tax-related legal
uncertainty has prevented mutual fund investors from participating in India's market.
In addition, the long tenor of RMBS combined with India's lack of a liquid secondary market
for the securities dampens investor appetite, notes Moody's

CONCLUSION
Residential Mortgage Backed Securities or RMBS issuances can definitely help in realising
the, Housing For All by 2022 mission of Indian government. As we saw before, the major
requirement lies in the non-urban areas. Hence affordable housing development is the need of
the hour. However given the huge requirement, there will definitely be a lack of liquidity in
this market. RMBS sole purpose is to create funds for further investments. Given the need,
and following the path laid down by IFMR Capital in issuing the first AHF mortgage backed
securities, more such will follow. The uniqueness of this model is what sets it apart from
conventional RMBS. State-run banks need to invest in these issuances so that their priority
sector lending targets will also be achieved. This we talked about achieving the demand side.
The supply side crunch will get resolved due to the three major changes brought by
government, removal of DDT from REITs dividend distribution, secondly passing of the real
estate regulation bill and thirdly fast forwarding of projects by giving SRA (slum
rehabilitation authority) the authority to acquire land rather than giving the task to the private
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developer (this final change is only for Maharashtra government) REITs listing of properties
will free the developers balance sheet of liabilities and it can then concentrate on further
projects.
It appears to be a right time to spearhead such projects as the macro-economic scene is dull
and foreign investors are looking for attractive investment options. The Canada Pension Plan
Investment Boards decision to invest in affordable housing projects is one such opportunity.
Many more will come as government tries to ease the path for them.
All-in-all, it can be concluded that as the government takes the right steps in clearing the
investment hurdles; RMBS, REITs will pave the way forward for Housing for All by 2022.

BIBLIOGRAPHY
Websites:
http://www.ibef.org/industry/information-technology-india.aspx
http://www.datacenterknowledge.com/archives/2015/06/30/amazon-to-build-clouddata-centers-in-india/
http://corporate.sify.com/
https://en.wikipedia.org/wiki/CtrlS
http://www.tatacommunications.com/products-services/enterprises/data-centreservices
http://www.rcom.co.in/Rcom/aboutus/overview/overview_datacenter.html
http://www.netmagicsolutions.com/
http://searchdatacenter.techtarget.com/definition/data-center-services
http://whatis.techtarget.com/definition/disaster-recovery-as-a-service-DRaaS
https://en.wikipedia.org/wiki/Managed_security_service
S&Ps study guide
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