Did Investors Really Get Double-Duped with Re-REMIC Ratings?
Friday's downgrade, by Standard & Poor's, of several triple-A tranches of re-securitized real estate mortgage investment conduits (re-REMICs) brings to mind the early days of the crisis when it became apparent that triple-A paper isn't invincible. In looking at 12 transactions from 12 US RMBS re-REMIC, S&P lowered the ratings of 308 tranches, mainly triple-A, to junk status, mainly to triple-C. The primary credit analyst of the report, Cesar Romero, writes that "the downgrades reflect our assessment of the significant deterioration of the loans backing the underlying certificates." But isn't this a no-brainer? The resecuritization of REMICs into higher-grade paper was a strategy that helped issuers meet lower capital requirements, were they not? A double or triple-A re-REMIC with a risk weight of 20% requires 1.6 cents for every $1 of investment. Single-A, 4 cents, triple-B, 8 cents and so on. For junk paper an issuer needs $1 for every $1 invested. During the booming issuance last year, Amherst Securities warned against investing without due diligence, calling the ratings inconsistent. And, after all, if two ratings didn't work for MBS, why would one only work for re-REMICs? So wouldn't any investor going after this type of investment be a high-risk player to begin with? According to Deloitte partner Marty Rosenblatt, who authored a report on the Re-REMIC "phenomenon," in studying two 10-Q Q309 reports from banks that used Re-REMICs in order to help clean up their balance sheets it is noted that "the aggregate cash flows and their timing have not really changed" as a result. One bank sponsored its Re-REMIC and sold none, the other arranged 14 and sold two, recording a loss of $40.6m at the time of the sale, Rosenblatt found. So the bank recorded a loss with the sale? Interesting. I'm not suggesting that a credit rating of triple-A on a previously terrible MBS does not sweeten the deal, but let's be honest with ourselves. For the most part, the CRAs themselves largely steer clear of Re-REMICs. Of the downgrade Friday by S&P, Moody's Investors Service rated only two, DBRS didn't rate any, and Fitch Ratings stopped rating similar Re-REMICs long ago. By way of comparison, the Moody's Deutsche Mortgage Securities, Re-REMIC Trust Certificates, Series 2007-RS6, rated triple-A (cut to triple-C by S&P) was downgraded to single-B in June of 2009 and in January 2010 put on watch for possible further downgrade. The other, Residential Mortgage Securities Funding 2008-7, Ltd. Pass through certificates, originally triple-A, was downgraded to Caa1 in June of 2009 and in January 2010 put on watch for possible further downgrade. In all, Moody’s only rated about 15 RMBS resecuritizations in 2009, in a market of more than 120. "The senior pieces of those deals that we rated remain at triple-A to date," a Moody's spokesman tells me. So, even the CRAs keep these deals at arms length. Late last year, Fitch reported that it would no longer provide ratings on any Alt-A related re-REMICs. And DBRS spokesperson Quincy Tang said DBRS continues to rate RMBS re-REMICs, "although on a limited basis compared to our peers." "We have taken some rating actions on the 2007-2008 vintage re-REMICs in August of last year, and are currently viewing the 2009 vintage re-REMICs," Tang adds. But despite the clear warnings, re-REMICs have been and will be sold. From an accounting perspective selling at least 10% of a re-REMIC is favorable as less means proceeds must be recorded as collateralized borrowing on balance sheet. But let's not assume that the whole thing is some conspiracy to double-dupe the so-called hapless investors who careless stumble into this space. Can't we give ourselves more credit than that? Jacob Gaffney is the editor of HousingWire and HousingWire.com. Write to him.