With several U.S. subprime residential lenders announcing subpar 2006 earnings in recent weeks, the latest chapter in the subprime mortgage market slowdown may present a fairly minor problem for U.S. REIT-specific TruPS (Trust Preferred Securities) CDOs, since a majority of their collateral is made up of residential mortgage loans, according to a new report by analysts from Fitch Ratings and Derivative Fitch. Though research by Fitch shows that REIT TruPS CDOs make up approximately 13 percent of the entire TruPS CDO arena, Fitch Managing Director and REIT group head Steven Marks said that the inclusion of residential mortgage obligor TruPS has actually declined over the last two years. “Spreads have tightened and the yields on the TruPS are not cost-effective for issuers,” said Marks. Exposure to subprime residential mortgage lenders represents only 8.4 percent of total residential mortgage lender exposure (i.e. inclusive of prime and sub-prime) within REIT TruPS CDOs and hybrid CDOs, Fitch said. Furthermore, exposure to sub-prime residential mortgage lenders represents only 1.8 percent of total REIT TruPS collateral included in REIT TruPS CDOs and hybrid TruPS CDOs. Nonetheless, Derivative Fitch Senior Director Nathan Flanders said that Fitch continues to actively monitor the sector and how it may affect transaction risk. “There have been no deferring or defaulted residential mortgage company entities in any Fitch-rated TruPS CDOs to date,” said Flanders. For more information, visit http://www.fitchratings.com.

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