Monday, December 21, 2009

Rating re-Remics

Original p

Re-Remics, those recooked RMBSs, made headlines this year, as financial players rushed to solve the securitisation crisis by err, engaging in more securitisation.

In fact, according to research by Amherst Securities, about $43bn worth of re-Remics were created between January and November this year; Most of those made after investors found themselves holding onto RMBS securitisations with “cashflows that do not fit their needs” — which is a nice way of saying the securities had been downgraded.

Here’s a bit more detail from Amherst’s mortgage team, led by Laurie Goodman:

. . . the less than investment grade securities are, in some cases, no longer eligible investments for the institutions that purchased them. In other cases, they occupy the very limited “less than investment grade” allocation. For regulated institutions, the downgraded securities often require “other than temporary impairment” charges to be taken, and require higher capital charges. Re-REMICs allow for the transformation of cash flows on a downgraded bond into cash flows which better meet the needs of investors; the original security is re-tranched into: (1) a new, properly enhanced AAA security + (2) a junior bond

. . .

Most of this year’s $43 billion has been arbitrage re-REMICs; deals in which a dealer buys the bonds, carves them up, then sells all the pieces. These deals have been very dependent on the front bond obtaining a AAA rating. Exhibit 2 shows that over 95% of the re-REMIC transactions have been backed by prime and Alt-A collateral. Option ARM and subprime deals are quite rare (on those deals, it can be difficult to create enough AAA bonds to make the transaction economically advantageous).

One of the really interesting things then, is how ratings agencies are rating these relatively new securitisation structures, bearing in mind that one of the reasons the things were created in the first place was to bypass those ratings downgrades.

The below table from Amherst is instructive:

Rating agency activity - Amherst

The vast majority of re-Remics are coming to market with a single rating by a single agency. Much of that is due to individual quirks between the agencies’ criteria for rating the securitisations.

Fitch, for instance, no longer rates deals backed by Alt-A collateral (something Amherst finds perplexing, but could well turn out to be a prudent move). S&P will only rate re-Remics in which it can also rate the underlying bonds, while Moody’s won’t rate re-Remics where it’s in the process of re-rating the underlying bonds.

With the vast majority of re-Remics carrying only one rating, then, the issue of rating consistency becomes much more important. Back to Amherst:

The fact that most re-REMICs are getting done with only one rating produces ratings between AAA re-REMIC tranches that are inconsistent; i.e., not all AAA ratings are created equal. With S&P making it difficult to obtain a rating on a deal where they did not underwrite the underlying bond, Fitch unwilling to rate Alt-A deals, and Moody’s in and out of the market—some deals may have 4 firms willing to rate the securities, while other deals may have only one willing rating agency. And if only one rating agency is willing to rate a security, that remaining agency may be very conservative. As a result of the ratings patchwork, some of the ratings look too aggressive to us, while others too conservative.

Which basically translates into one big caveat emptor for would-be re-Remic investors.

But if you want to see just how the ratings can vary, while getting a good granular look at two re-Remic deals, click here to read the tale of WFMBS 2007-8 2A 11 and RAMP 2004-RS6 AI6, and much more, in the full Amherst note.

Related links:
All roads lead to retranching in CRE crunch – FT Alphaville
Re-mimicking the crisis – FT Alphaville
Amherst sees `inconsistent’ triple-A re-Remic ratings – HousingWire
The role of ratings in structured finance – BIS paper

No comments: