Resecuritizations or ReREMICs are following the trajectory of the ABS market pretty closely.
ABS participants initially turned to this structure because it was a path to market liquidity. It was good way for dealers to try to move inventory around. In fact, in October, there were a few ReREMICs that came to market, most of which were driven by liquidity needs.
However - since they are still part of the volatile market that we are all experiencing - sources said that bid lists for these transactions have been revised daily as a result of pricing and supply considerations. For now, the market for these deals has dried up.
The motivation for structuring ReREMICs has changed as well. Instead of seeking liquidity, investors in ReREMICs are now using the structure for regulatory capital relief.
"From a credit standpoint, issuers come to market with ReREMICs in anticipation of rating agency downgrades," said Quincy Tang, senior vice president at DBRS. Rather than being downgraded entirely, and having to put up more capital against the bond as a result, ReREMICs allow issuers to limit their negative exposure to a given security.
"The retranching affords investors an optimal triple-A bond size, which, for regulatory capital requirements, is beneficial because a rating downgrade on the underlying bond(s) would result in a higher requisite amount of capital to be held against the position," said Bernard Maas, vice president at DBRS.
For instance, if a ReREMIC is structured into to two tranches - A1 and A2 - and it's restructured as an 80/20 ReREMIC, then investors preserve the A1 portion and isolate the A2 portion that's been downgraded, and only apply the 8% or so risk weighting on the downgraded portion of the security.
For now though, ReREMICS have followed the same story of stalled issuance as seen in the ABS market.
Sources said that with the Troubled Assets Relief Program (TARP) no longer slated to be used for buying assets (see cover story), market participants might feel compelled to employ ReREMIC strategies - something that could potentially swell issuance in these structures.
But that still remains to be seen.
ReREMICs, like most securitization structures that serve a good purpose, have become victims of the investor backlash against all that looks and feels like a structured vehicle.
It's one more piece of evidence that the market still has a long way to go in its search for liquidity and regulatory capital relief.
Market players have not stopped thinking creatively, however. Recently Merrill Lynch analysts talked about a proposal that the market allow certain ReREMIC classes that are economically the same as passthroughs to basically be remade into passthroughs.
According to the research, if this were to happen, the recombined CMOs could give a considerable lift to the CMO market, specifically those classes that are the most likely beneficiaries.
But the questions remain: Will these types of proposals survive? Or are they just an exercise in futility?
"It's a pipe dream that liquidity for CMOs and other products will return without the financial sector bottoming out," a source said. "No one has any balance sheet to commit to the market, so investors are creating their own liquidity. The irony is that this would be a great time to trade a CMO book if you have capital - the bid/ask spreads are probably enormous."
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