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A Net Interest Margin Security ("NIM") is the securitization of excess cash flow from residential mortgage-backed securitizations ("RMBS") effected by the re-securitization of economic residual interests. This excess cash flow remains after the interest entitlements on the underlying deal have been satisfied, which includes the payment on the underlying securities, the payment of fees of the underlying trust, the funding of any reserve funds, the covering of current period losses and the building and maintenance of the required level of overcollateralization of the underlying trust. The first NIM was issued in 1994, and although NIM-type transactions involving auto loans and student loans have been offered in the past, today NIMs are commonly associated with RMBS, including securitized subprime loans, home equity loans, and Alt-A loans.
UNDERLYING TRANSACTION
To successfully structure a NIM, one must understand the underlying RMBS securitization and construct the NIM based on the characteristics of the underlying transaction. Any risks that exist within that structure must be addressed within the NIM. Because a NIM involves the securitization of excess cash flow, the starting point of a NIM is to ensure that the structure of the underlying transaction provides an amount of cash flow that is not required by the underlying trust. Accordingly, a NIM is possible only where the underlying transaction involves economic residuals, such as in the common "overcollateralization" or "OC" structure. Generally, in an RMBS transaction where credit enhancement is provided by overcollateralization, the extent by which the aggregate mortgage pool balance exceeds the aggregate certificate balance defines the amount of overcollateralization. After the required overcollateralization amount is realized, and other required allocations of excess cash flow have also been satisfied, then excess cash flow is distributed to the holder of the residual interest. The other common form of RMBS transaction that uses a subordination and shifting interest structure does not result in substantial economic residuals and therefore is not able to accommodate a NIM. However, the most common form of RMBS involving overcollateralization does also have a subordination component, and does result in an economic residual interest.
Excess cash flow is derived primarily from interest on the mortgage loans. The underlying RMBS transaction uses interest from the underlying mortgage loans to pay interest on the RMBS certificates, servicing...