The CMBS, re-Remic muddle

July 23, 2009

FT’s Alphaville has a great post on re-Remics and the push to make them respectable, at least in the eyes of the Federal Reserve and its TALF program.

If the Fed were to accept repackaged CMBS in its TALF program, it would go a long way in feeding the securitization machine that Wall Street banks are eager to jump start. But is that a good thing? The re-Remics are essentially repacking problem CMBS bond deals so they can create a “bullet-proof” AAA slice for investors who don’t want to have to worry about downgrades. If you’re thinking you’ve seen this movie before, you’re not alone.

There’s also the little problem of finding investors who want to take the riskier, or junior, tranches that are created by the re-REMIC. Like a CDO, the risk doesn’t go away, it’s just shifted around.

Re-Remics started popping up last month after S&P warned it would downgrade a huge swath of CMBS bond deals.  Wall Street responded by slicing and dicing the AAA portion to create a top slice within the top slice,  a super, super-duper portion if you will.

This is all coming at a time when the Fed’s TALF program is still trying to find investors who want to participate. Last week, loan applications using legacy CMBS as collateral didn’t even break the $1 billion mark, and even then, not all the collateral was accepted.

The Fed said late Wednesday that it rejected one bond, CUSIP # 46630JAK5, for one of two reasons: it didn’t qualify under the programs terms, or it didn’t pass the bank’s stress test.

The S&P snafu this week has muddied the waters even more, with some CMBS deals qualifying for TALF one day, not the next, and then qualifying again a week later.

Adding re-REMICs to the mix promises to confuse things even more.

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