Thank you for the question Mr T. As discussed, ‘skin in the game’ is the excess spread or profit margin. The excess spread is received monthly and is basically the difference between the interest earned on the mortgage pool less the interest paid on the bonds (RMBS) and the costs of servicing etc. The excess spread on a Prime RMBS transaction is typically between 0.55% and 1.00% of the total mortgage pool. The excess spread is only earned on the basis that there are No losses on the underlying bonds (RMBS). Hence, before any losses accrue against the bond (RMBS), the excess interest takes the first hit. However, prior to the excess spread being impacted, borrowers equity needs to be completely impaired (sale of the property minus the loan) and any lenders mortgage insurance applied. In Australia, all losses on borrowers default across Prime and Non Conforming RMBS transactions have been covered by Lenders Mortgage Insurance claims paid and excess spread. You also have a question with respect to the “typical triggers” for the Issuers to take a hit.? After the borrowers deposit and LMI, if any, any losses after a borrower defaults on their homeloan will be borne by the bank through a reduction in their excess spread. There is no “hit” for a increase in arrears except this may result in the senior AAA RMBS bonds receiving more of the principal repayments resulting in a higher cost of RMBS funding and reduction to excess spread. Thank you again Mr T and I hope that answers your question.

On Protecting investors through ‘skin in the game’ -