Re-REMICs: New and Improved

During the first nine months of 2009 we have seen over $30 billion of new issuance of Non-GSE (aka private label) residential mortgage securitizations that are using other RMBS transactions for collateral. In industry parlance, these "re" securitizations are known as reREMICs.1 This spike in volume reflects the fact that the underlying securities, all originally purchased with an AAA rating and thought to have little or no credit risk, have either already been, or are likely to be, downgraded. Thus they are no longer eligible investments for many market participants, including many current holders. Within Prime, AIt-A, and Subprime, virtually all of the 2006 and 2007 AAA securities, and most of the 2005 securities, are likely to take credit losses and to be rated as Defaulted by the end of this cycle. It is important to understand that the fundamental performance of the loans supporting the 2005, 2006, and 2007 vintage deals is stunningly awful. However, the negative rating migration places additional downward pressure on these asset prices. Properly structured re-BJiMICs can alleviate much of the price pressures that arise from these technical issues by reallocating the cash flows of these underlying securities to create new, properly enhanced, AAA securities that better meet the needs of investors, usually by adding more subordination to the senior security.

In this article, we look at current day reREMICs, making the point that most are far better designed than either the underlying collateral or the previous generation of rejREMICs. The new "super duper" tranche has more locked-out credit enhancement than ever before. And, given the current market dislocations, these securities can be sold at yields that look appealing versus other "safe" alternatives. The mezzanine tranches carved from reREMICs are more explicidy levered credit bets. In a few of these deals, an exchangeable structure is employed on at least some of the tranches (similar to the MACR - modifiable and combinable REMIC certificate - structure in Freddie Mac CMOs), providing further flexibility. We believe that all re-REMICs should be broken down into component building blocks to allow for flexibility going forward. The re-REMICs in turn provide an important technical support for the private label RMBS market, as it increases the buyer base for these securities.

THE VALUE OF A RE-REMIC