Researchers from Morgan Stanley delved deep into the obscure realm of post-NIM securities, last week. Post-NIMs, or "baby equity," offer an attractive alternative to mortgage derivatives for ABS and MBS investors seeking yield, claims the firm. "We believe that post-NIM residuals should not be considered an off-the-run market, but a clear alternative to traditional yield enhancers," write Morgan Stanley researchers, who estimate $10 billion worth of post-NIMs are being produced each year.

The health and payment rates of NIMs, and especially post-NIMs, are closely tied to excess spread and collateral losses. If loans in a deal begin to prepay too quickly, the post-NIMs will not be paid down until late in its term, as prepayments thin the excess spread.

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