Residential Mortgage-Backed Securities (RMBS)

Residential Mortgage-Backed Securities (RMBS)

RMBS are securities created by pooling residential mortgage loans and selling claims on their cash flows to investors. Saudi Arabia’s first RMBS transaction was completed by SRC in August-October 2025, following SAMA no-objection approval. The structure includes senior, mezzanine, and junior tranches with sukuk compatibility. HSBC Saudi Arabia arranged the deal. S&P Global Ratings assessed the Saudi RMBS market as a large opportunity anchored by USD 180 billion in home loans. RMBS development enables banks to offload mortgage assets, maintaining lending capacity for continued origination to serve Sakani beneficiaries and private borrowers. See Mortgage Market Dashboard and SRC Profile.

Definition and Financial Mechanics

Residential mortgage-backed securities are structured financial instruments created through a process called securitisation. An originator — typically a bank or a specialised intermediary like SRC — assembles a pool of individual residential mortgage loans into a portfolio. This portfolio is then transferred to a special purpose vehicle (SPV) that issues securities backed by the cash flows from the underlying mortgages. Investors who purchase these securities receive periodic payments derived from the mortgage principal and profit (interest equivalent) payments made by homeowners.

The process serves a critical economic function: it transforms illiquid, long-duration mortgage assets sitting on bank balance sheets into tradeable securities that can be sold to institutional investors — pension funds, insurance companies, sovereign wealth funds, and asset managers. By selling mortgage portfolios into the capital markets, banks free up balance sheet capacity to originate new loans, creating a self-reinforcing cycle of lending, securitisation, and re-lending that deepens the overall mortgage market.

In the Saudi context, RMBS must comply with Sharia principles governing Islamic finance. The underlying mortgages are structured as Murabaha (cost-plus sale) or Ijara (lease-to-own) contracts rather than conventional interest-bearing loans. The securities issued against these portfolios take the form of sukuk — Islamic financial certificates representing proportional ownership of tangible assets — rather than conventional bonds. This sukuk compatibility is essential for attracting the full universe of Saudi and Gulf institutional investors, many of whom operate under Sharia-compliant investment mandates.

Tranche Structure and Risk Allocation

RMBS transactions are typically structured with multiple tranches that allocate risk and return differently across investor classes. Saudi Arabia’s inaugural RMBS issuance included senior, mezzanine, and junior tranches. Each tranche represents a different position in the priority of payments and loss absorption.

Senior tranches receive payment first and bear losses last. They offer the lowest yield but the highest credit protection, making them suitable for conservative institutional investors such as bank treasuries and sovereign wealth funds. In a well-performing portfolio where mortgage defaults are minimal, senior tranche holders receive all contractual payments on schedule.

Mezzanine tranches sit in the middle of the capital structure. They receive payments after senior tranches are satisfied and absorb losses after junior tranches are exhausted. The intermediate risk profile commands a higher yield than senior securities, attracting investors with moderate risk appetite and longer investment horizons.

Junior tranches bear losses first and receive payments last. They offer the highest potential returns but carry the greatest risk of principal impairment if mortgage defaults exceed expected levels. In many RMBS structures, the originator or arranger retains a portion of the junior tranche to demonstrate continued alignment of interest with investors — a practice known as “skin in the game” that became a standard feature of global securitisation markets following the 2008 financial crisis.

Saudi Arabia’s Inaugural RMBS Transaction

Saudi Arabia’s first RMBS transaction was completed between August and October 2025, marking a milestone in the Kingdom’s capital markets development. The transaction followed SAMA’s no-objection approval on August 21, 2025, which provided the regulatory clearance necessary for a novel financial instrument in the Saudi market.

SRC (Saudi Real Estate Refinance Company) served as the transaction sponsor. Established by the Public Investment Fund (PIF) in 2017 and licensed by SAMA, SRC was created specifically to develop the housing finance market by providing liquidity to mortgage lenders through refinancing and securitisation. The inaugural RMBS transaction represented the culmination of years of institutional preparation, regulatory framework development, and market conditioning.

HSBC Saudi Arabia arranged the deal, providing the structuring, distribution, and execution capabilities required for a complex securitisation transaction. A&O Shearman advised HSBC on the transaction, while White & Case advised SRC, ensuring robust legal frameworks governing the SPV structure, asset transfer mechanics, and investor protections.

Market Opportunity and Scale

S&P Global Ratings assessed the Saudi RMBS market as a large opportunity anchored by USD 180 billion in home loans across the Kingdom’s banking system. This assessment reflects the sheer scale of Saudi Arabia’s mortgage market, which grew from approximately SAR 200 billion in 2018 to SAR 800 billion by 2024, and reached SAR 951.3 billion by end of 2025 — a 7.7 percent rise during the year. Real estate lending constituted nearly 30 percent of total bank credit by mid-2025, indicating both the market’s significance and the concentration risk that securitisation can help mitigate.

The mortgage market is targeted to reach SAR 1.3 trillion by 2030, expanding by an additional SAR 500 billion over the remainder of the decade. This growth trajectory creates a sustained pipeline of mortgage assets available for securitisation, suggesting that the inaugural RMBS transaction is the beginning of a programmatic issuance strategy rather than a one-off event.

SRC’s broader capital market activities provide the infrastructure for sustained RMBS issuance. The company completed a SAR 20 billion guaranteed local sukuk program, including a final issuance of SAR 3.5 billion in dual tranches of 5 and 7 year durations. Internationally, SRC established a USD 5 billion program listed on the London Stock Exchange, with a first issuance of USD 2 billion completed in February 2025 that was oversubscribed 6 times by over 300 institutional investors in two tranches of 3 and 10 year maturities. These capital market activities, while not RMBS per se, demonstrate investor appetite for Saudi housing-linked securities and establish SRC as a credible issuer in global debt markets.

Why RMBS Matters for the Housing Programme

The connection between RMBS and the Vision 2030 Housing Program is structural rather than cosmetic. The housing programme’s success depends on sustained mortgage origination — families need access to financing to purchase the hundreds of thousands of units being delivered by NHC and ROSHN. In 2024, 107,000 housing finance contracts were signed. In 2025, 108,795 new residential mortgage contracts were issued with a total value of SAR 80.42 billion.

Banks have finite balance sheet capacity. As mortgage portfolios grow, they consume capital that could otherwise support new lending. Without a mechanism to move existing mortgages off bank balance sheets, the growth in outstanding loans would eventually constrain new origination capacity. RMBS provides that mechanism — banks sell portfolios to SRC, SRC securitises them into RMBS, investors purchase the securities, and banks use the proceeds to fund new mortgage originations.

This cycle is particularly important for REDF-subsidised lending, where the government bears profit coverage costs and the banks bear credit risk. SRC has already signed an agreement with REDF to refinance a real estate portfolio worth SAR 10 billion, and its agreement with Al Rajhi Bank has reached SAR 10.8 billion for the purchase of real estate financing portfolios. SRC’s total refinancing deals have exceeded SAR 12 billion with an 85 percent growth rate, and the company targets SAR 75 billion (USD 20 billion) in mortgage refinancing within five years.

Credit Quality and Risk Considerations

The credit quality of the underlying mortgage portfolio is fundamental to RMBS performance. Saudi mortgages benefit from several structural protections that support credit quality. SAMA’s LTV regulations require a minimum 10 percent down payment for standard borrowers (5 percent for Dhamanat-guaranteed Sakani beneficiaries), ensuring borrower equity from origination. The DTI limit of 55 percent of monthly income (65 percent for Housing Program beneficiaries) prevents over-leveraging. Sharia-compliant financing structures, where the bank retains legal title to the property until full payment, provide strong collateral protections.

The declining interest rate environment — with the SAMA repo rate falling from 5.50 percent in September 2024 to 4.25 percent by December 2025 — supports borrower affordability and reduces default risk. However, the majority of Saudi mortgages are structured with variable profit rates indexed to SAIBOR or the repo rate, meaning that future rate increases would increase borrower payment burdens and could affect RMBS credit performance.

SRC’s credit ratings — Fitch A+ (Stable), S&P A (Positive), and Moody’s A2 (Positive) — reflect both its PIF ownership and the credit quality of its refinancing portfolio. These investment-grade ratings support SRC’s ability to issue RMBS at competitive pricing, which in turn makes the refinancing model economically viable for partner banks.

RMBS in Regional and Global Context

Saudi Arabia’s entry into the RMBS market places it among a small number of jurisdictions globally that have developed Islamic securitisation frameworks. The UAE has issued mortgage-backed sukuk, and Malaysia has an established Islamic securitisation market, but the scale of Saudi Arabia’s underlying mortgage pool — USD 180 billion and growing — positions the Kingdom as potentially the largest Islamic RMBS market globally.

The development of a Saudi RMBS market also has implications for the broader capital markets ecosystem. RMBS creates a new asset class for Saudi institutional investors, provides a benchmark for pricing mortgage risk, and establishes legal and regulatory precedents for future securitisation transactions beyond residential mortgages — including commercial real estate and infrastructure finance.

The residential price index showed a 2.24 percent decline during the year to Q4 2025, contrasting with a 5.12 percent year-on-year increase in Q1 2025. This price moderation, combined with the Riyadh rent freeze implemented through the Ejar platform, creates a more stable operating environment for RMBS credit analysis than a rapidly appreciating market where price corrections could trigger negative equity scenarios.

Regulatory Framework for Securitisation

The development of RMBS in Saudi Arabia required SAMA to establish a regulatory framework governing asset transfer, SPV formation, investor protection, and disclosure requirements. SAMA’s no-objection process for the inaugural transaction involved evaluation of the legal structure, credit risk transfer mechanics, and investor communication standards. This framework-building process is significant beyond the individual transaction — it establishes the regulatory infrastructure for programmatic RMBS issuance.

The interaction between RMBS and the Wafi programme deserves attention. Wafi’s escrow protections and developer qualification requirements improve the quality of housing assets underlying mortgages that may eventually be securitised. A mortgage on a Wafi-regulated off-plan unit, backed by structural warranties and delivery guarantees, represents a different credit profile than a mortgage on an unregulated property. As the Wafi framework strengthens the quality of the housing stock, it indirectly supports the credit quality of RMBS portfolios.

Future Development and Market Maturation

The inaugural RMBS transaction establishes a template for future issuances. As the market matures, several developments are expected. Standardisation of disclosure and reporting will improve investor transparency. Rating agencies will develop Saudi-specific mortgage performance models. The investor base will broaden beyond initial participants to include international institutional investors attracted by the Saudi mortgage market’s scale and credit quality.

Jadwa Investment expects demand for mortgage financing to gradually improve during 2026, supported by declining interest rates and greater availability of housing options. This improving demand translates directly into a growing pipeline of mortgage assets available for securitisation, supporting the case for regular RMBS issuance as a permanent feature of Saudi capital markets.

The White Land Tax reform, by releasing developable land and potentially moderating property prices, could also improve RMBS credit dynamics by reducing the likelihood of borrowers ending up in negative equity positions — a scenario where the outstanding loan balance exceeds the property’s market value.

The importance of RMBS to the housing programme’s final phase cannot be overstated. With the mortgage market targeting SAR 1.3 trillion by 2030 and NHC plus ROSHN delivering nearly one million units, the volume of mortgage origination required to finance these purchases will strain bank balance sheets without a functioning securitisation market. RMBS provides the release valve that keeps the lending pipeline flowing — converting static mortgage assets into liquid capital markets instruments and recycling that capital into new mortgage originations that serve the next cohort of Sakani beneficiaries.

For detailed analysis, see SRC RMBS Market Development, SRC Company Profile, SAMA Interest Rate Policy, Mortgage Market Dashboard, Mortgage Market Outlook 2026, Saudi Mortgage Guide, and Murabaha vs Ijara Comparison.