Table of Contents

Net Interest Margin Securities (NIMS)

By

James Chen

Updated April 04, 2023

Reviewed by

Charlene Rhinehart

Fact checked by

Suzanne Kvilhaug

What Are Net Interest Margin Securities (NIMS)?

A net interest margin security (NIMS) is a real estate security where holders receive excess cash flows from securitized mortgage loan pools. NIMS is a specialized kind of second-class mortgage-backed security (MBS).

Net interest margin transactions offer sponsors of residential mortgage-backed securitization transactions a way to repackage excess cash flow after the interest on the underlying deal has been satisfied. The underlying asset is commonly rated by companies like Moody’s.

Key Takeaways

NIMS is a specialized kind of second-class mortgage-backed security (MBS).
A net interest margin security (NIMS) is a real estate security where holders receive excess cash flows from securitized mortgage loan pools.
NIMS securities are often purchased through private placement transactions, or by investors who specialize in mortgages.
Fannie Mae is one entity that began securitizing loans and issuing MBS in the 1980s.

Understanding Net Interest Margin Securities (NIMS)

This subset of mortgage-backed securities is a type of asset-backed security that packages mortgages into a product investors can buy. NIMS exists because numerous securitized mortgage pools contain subprime mortgages with higher interest rates than the rates typically offered to mortgage-backed security (MBS) investors.

The more significant the difference in these interest rates, the higher the excess cash flow generated by the MBS is, and thus, the higher the value of the NIMS will be. Some of the excess funds will go to senior creditors in payment for losses and overhead, and the balance will go to investors. For NIMS investors, the possibility of principal prepayments and losses on mortgage loans must be accommodated.

Purchasing NIMS

Net interest margin securties are often purchased through private placement transactions or by investors who specialize in mortgages. The firm that originated the mortgage loans and issued the MBS is the same firm that will invest in the NIMS. Mortgage-backed security issuers commonly securitize their residual interest.

To provide liquidity to the mortgage investment market, Fannie Mae is one entity that began securitizing loans and issuing MBS in the 1980s. Fannie Mae assumes the default risk on the mortgages underlying the security and guarantees timely payments of principal and interest, even if the borrower defaults.

If there is a significant increase in the default rate of the mortgages held in the MBS, there will be a subsequent decrease in excess cash flows. The reduction in cash flow will lead to a quick decline in the profitability of the value of a net interest margin security.

What Is a Mortgage-Backed Security (MBS)?

A mortgage-backed security provides investors with a monthly distribution of principal and interest payments generated by homeowners. MBS are backed or issued by the Government National Mortgage Association (Ginnie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal National Mortgage Association (Fannie Mae).

When Did Net Interest Margin Securities Originate?

NIMS first became available on the open market in the mid-1990s, though some entities like Fannie Mae provided mortgage-backed securities in the 1980s.

What Role Did NIMS and MBS Play in the 2007-2008 Financial Crisis?

As a kind of mortgage-backed security, NIMS had a role in the mortgage crisis of 2007-2008, caused by an overextension of mortgages to weak borrowers, repackaged and sold to lenders. Once the housing market began to decline, the value of NIMS and other mortgage-backed securities fell sharply. As mortgage-related losses grew, many securitized mortgage products began to lose liquidity. The net effect of the sudden decline in NIMS and other mortgage-backed securities contributed to investor fear.

The Bottom Line

Net interest margin securities are specialized second-class mortgage-backed securities (MBS). Entities like Fannie Mae have provided mortgage-backed securities since the 1980s. A NIMS receives excess cash flows from securitized mortgage loan pools. As a type of mortgage-backed security, NIMS had a role in the mortgage crisis of 2007-2008, with the overextension of mortgages to weak borrowers that were repackaged and sold to lenders.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Moody's. "Mortgage Backed Securities Division."
The Journal of Structured Finance. "Legal Structure of Net Interest Margin Securities."
ProEducate. "Private MBS," Page 5.
Fannie Mae. "Basics of Single-Family MBS."
Fidelity. "What Are Mortgage-Backed Securities?"
Becker Friedman Institute for Economics at the University of Chicago. "Mortgage-Backed Securities and the Financial Crisis of 2008: A Post Mortem."

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