Tuesday, July 8, 2008

Re-REMIC gimmick: Mutton dressed as lamb?

(FT Alphaville) That’s resecuritisation of real estate mortgage investment conduits. Also known as: mutton dressed as lamb. Or in the patois of the international back-office banking shameless: recooked CDOs

Bloomberg reports today that re-Remics are growing rather popular:

Goldman Sachs Group Inc., JPMorgan Chase & Co. and at least six other firms are repackaging unwanted mortgage bonds as sales of CDOs composed of asset-backed securities fall to less than $1 billion this year from $227 billion in 2007 because of the global credit crunch.

“It’s just the reincarnation of the CDO,” said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. “The mechanics are the same, but you’re getting in at a much different level of valuation.”

A re-remic is - to all intents and purposes - a CDO. A collateralised debt obligation. It’s a CDO with a few structural quirks like low granularity or sequential capital repayment that are supposed to convince investors it’s a different thing entirely.

In a report last month, UBS analysts said one of the key things about re-remics was structuring them specifically to ensure that tranches wouldn’t get downgraded. It’s securitisation then, but just tailored to current buyers needs - and capital.

A different name. A different price. Seems to be working:

More than $9.3 billion of Re-Remics were created in the first five months of 2008, almost triple a year ago, according to Inside MBS & ABS. The debt represented 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

Remics are not though, some kind of magic bullet. They still have problems. The ratings re-Remic tranches target are specifically achieved through levels of collateralisation, and in the current market, no level is certain. And as Fitch warned at the end of June, we are entering a severely slower payment environment - an environment in which all those new quirks exhibited by re-Remics, will be tested.

Securitisation isn’t back just yet. The CDO certainly isn’t.

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