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The CMBS, re-Remic muddle

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.

from Rolfe Winkler:

S&P upgrades CMBS to AAA week after downgrading to BBB-

From Reuters:  S&P tweaks CMBS model, reverses week-old downgrades

Standard & Poor's on Tuesday reversed some controversial downgrades of widely watched commercial mortgage-backed securities in a highly unusual response to investor ire.In a rare and dramatic reversal from just a week ago, S&P upgraded the bonds to the top AAA rating. The move reinstates their coveted eligibility under a Federal Reserve lending program that is behind a strong rally for the $700 billion market.

Among upgrades, S&P raised ratings on the A2, A3 and A-AB classes in Goldman Sach's 2007-GG10 transaction, considered a benchmark for CMBS, back to AAA from BBB-minus.

Commercial real estate still looking for a lift

Chalk up another stumble for TALF, the Fed’s program to revitalize the securitization market. After expanding the program to include commercial mortgage-backed securities, the Federal Reserve on Tuesday reported that no one showed up to take advantage of the central bank’s attractive financing.  Granted this was the inaugural round for loans to investors with eligible CMBS collateral, so it may take some time to take off.

But it certainly sends a worrying signal about how much this program will help unclog the frozen CMBS market – essential if developers and commercial real estate owners hope to refinance loans coming due.

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