Net Interest Margin Securities (NIMS)

A net interest margin security (NIMS) is a real estate security which allows holders to receive excess cash flows from securitized mortgage loan pools. In a typical NIMS transaction, excess cash flow from the securitized mortgage loan pool is transferred into a trust account. Investors in NIMS subsequently receive interest payments from this trust account.

Net interest margin securities are a specialized kind of second-class mortgage-backed securities (MBS). These MBS are asset-backed securities which package mortgages into a product investors can buy. NIMS exist 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 are, 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. Also, it is common practice for NIMS investors to receive senior claims on the receipts of any prepayment penalties levied on the underlying mortgages. 

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 (NIMS).

NIMS securities are most often purchased through private placement transactions, or by investors who specialize in mortgages. In many cases, 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 are thus frequently found securitizing their residual interest.

NIMS first became available on the open market in the mid-1990s. Initially, the securities performed poorly, paying at a slower rate than what was anticipated. This poor performance was mostly attributable to poorly structured deals. Subsequent transactions benefited from significant structural upgrades in the securities.

As a kind of mortgage-backed security, NIMS had a role in the mortgage crisis of 2007-2009. The complexity inherent in the securitization of mortgages led many investors to downplay the risk. Once the housing market began to decline the value of NIMS, and other mortgage-backed securities fell sharply. As mortgage-related loss piled up and grew more significant, many securitized mortgage products began to lose liquidity. The net effect of the sudden decline in NIMS and other mortgage-backed securities was to contribute to the fear of investors which ultimately led to a more general financial crisis.