Mortgage Bonds

Mortgage bonds are a category of bond backed by a pool of residential or commercial mortgages. These bonds are commonly known as Mortgage-Backed Securities (MBS), usually issued by banks, Housing Finance Companies (HFCs) and specialized financial institutions. They are created when banks/NBFCs/financial institutions pool together home loans and sell them to investors as bonds. These bonds are ideal for risk-averse investors seeking stable income and lower risk compared to unsecured bonds.

The home loans are packaged together and sold as tradable securities called Pass-Through Certificates (PTCs), allowing lenders to free up capital and issue more loans. Investors of these mortgage bonds receive coupon payments that come from the borrower’s EMI on the underlying mortgages. If borrowers default, investors have the legal right to claim the underlying mortgages to recover their investments. This process is part of securitisation, regulated by the Reserve Bank of India (RBI). The securities are classified into different tranches with varying maturities, risk levels and payment priorities.

Residential Mortgage-Backed Securities (RMBS)

Residential Mortgage-Backed Securities are backed by a pool of home loans created by pooling together residential mortgages. These bonds offer interest payments and principal to the investors, like regular corporate bonds. 

India’s first mortgage-backed Pass Through Certificates (PTCs)

On May 5, 2025, India listed its first mortgage-backed PTCs on the NSE, backed by a pool of housing loans issued by LIC Housing Finance Ltd. It is structured by RMBS Development Company Limited with an issue price of Rs 1,000 crores (face value of Rs 1 lakh). It was the first time that home loans were transformed into a exchanged listed instrument. 

Key Highlights:

Commercial Mortgage-Backed Securities (CMBS)

Commercial Mortgage-Backed Securities (CMBS) are backed by cash flows from commercial real estate. This may include rental income from retail assets or office parks. The commercial properties for which lease rentals are to be securitised are housed in a Special Purpose Vehicle (SPV). Indian CMBS involves higher risks relating to legacy issues in SPVs. This includes construction disputes, share pledges or tax issues, compared to similar issuances across the world. 

Both mortgage bonds and covered bonds are collateralised by loans, but they differ in terms of dual recourse, credit rating, off-balance sheet, pricing, safety, etc.