Investors should be cautious when looking at re-REMIC offerings, said Fitch Ratings.
With the recent scarcity in new RMBS volume, re-REMIC issuance has in-creased. However, Fitch believes that some recently issued re-REMICs have had insufficient credit enhancement to support triple-A ratings, given their collateral and structural features.
Most re-REMIC transactions have a subordinate tranche that provides credit support to the senior tranche. The subordination structure mitigates some of the concerns that investors have about potential losses and future downgrades that the underlying bonds might experience, the rating agency said.
However, the size of the credit enhancement a senior bond needs in a re-REMIC is highly dependent on the pay structures. Fitch has reviewed re-REMICS with variations of traditional sequential and pro-rata pay structure.
In the sequential pay structure, credit support will continue to build as the senior bond is reduced in size, since the subordinated bond is locked-out until the senior bond is paid off. For transactions using the pro-rata structure, principal on the subordinated bond is paid down concurrently with the senior bond, which may cause insufficient support when losses come through later.
"In order to provide sufficient credit enhancement in the re-REMIC, the subordinate bond generally needs to be much larger in a pro rata structure compared to a sequential structure, with our analysis showing that roughly two to three times were needed in some cases," U.S. RMBS Group Head Huxley Somerville said.
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