Net Interest Margin Securities (NIMS)

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Paul Tracy

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Updated August 5, 2020

What are Net Interest Margin Securities (NIMS)?

Net interest margin securities (NIMS) provide investors with cash flows from securitized mortgages. The first NIMS came into the marketplace in the mid-1990s.

How Do Net Interest Margin Securities (NIMS) Work?

When the homeowners make their mortgage payments, the proceeds make their way to the holders of mortgage-backed securities (MBS) that securitize their mortgages. If for any reason (interest rate differences, for example) the payments from the homeowners exceed the principal and interest payments owed to the owners of the MBS, the excess cash flows go into a trust account, and holders of NIMS are entitled to the excess cash flows in the trust account. The NIMS investors also often receive senior claims on the receipts of any prepayment penalties on the underlying mortgages. This speeds up the repayment to NIMS.

NIMS are typically bought in private placement transactions or by investors who specialize in the mortgage business.

Why Do Net Interest Margin Securities (NIMS) Matter?

The values of NIMS are based on the value of the excess cash flows a mortgage-backed security receives. Because the typical subprime mortgage securitization often is collateralized by mortgages that carry interest rates above the interest rates paid to the investors in the mortgage-backed securities, some of the difference goes to the senior creditors to cover loan losses and overhead, but the leftovers make for this second class of securities.

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