Testing Re-Remics | FT Alphaville

Testing Re-Remics

A Friday resecuritisation fail, via Bloomberg:

May 14 (Bloomberg) — Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year by Credit Suisse Group, Jefferies Group Inc. and Royal Bank of Scotland Group Plc.

The reductions were among downgrades to 308 classes of so- called re-remics, or re-securitizations, created from 2005 through 2009, the New York-based ratings company said today in a statement. About $150 million of the debt issued last year, as recently as July, with top rankings were lowered below investment grades…

More than just a swift ratings cut — this was a downgrade of Re-Remics, or resecuritisation of real estate mortgage investment conduits — or recooked RMBS.

You take a bond (typically super-senior) from a downgraded deal, slice it into new tranches, and presto — like subprime securitisation — you have conjured new AAA-worthy securities from what was once a festering pile of junk.

As the previous (rather flippant) description would suggest, Re-Remics are all about the credit ratings, so we would imagine that a migration from AAA to junk, after just a year, is something of a blow. Especially since S&P is the only major rating agency that requires that it also rates the bonds underlying Re-Remics — which means its due diligence would have been relatively rigorous.

Laurie Goodman over at Amherst Securities summarised the S&P process last year:

S&P has always made it difficult to get an S&P rating on a re-REMIC deal in which S&P did not rate the underlying bond. In their view, since they did not rate the underlying bond, they must perform due diligence on both the re-REMIC and the underlying deal. Those requirements are outlined in their March 17, 2009 report: S&P needs the underlying transactions documents, which they use to analyze to ensure that the transaction is consistent with their criteria for reps and warranties and for bankruptcy remoteness.2 They must also audit the underlying collateral and bond structure. To do that, S&P requires a current collateral tape that complies with S&P’s file format, and includes current consumer credit scores (no more than 6 months old). Thus, even if the underwriter could obtain borrower level information, they must pay an outside service to obtain updated credit scores, and hope that they can do so on a sufficient amount of the loans. Finally, S&P needs performance data, plus current and original enhancement levels, as they are not currently monitoring the deal. Once they have this information, they then evaluate whether they can provide a rating on the transaction. Consequently, if S&P did not rate the underlying bond, they are rarely asked to rate a re-REMIC backed by that bond: there is a large hassle factor in providing the information, coupled with the uncertainty as to whether the rating can be obtained. That serves as a limiting factor in the S&P market share . . .

The reason given by S&P for the downgrades is “significant deterioration” in the performance of the loans (mortgages) backing the deals. So presumably, even with all that due diligence, collateral tape and consumer credit scoring, the agency still seems to have overestimated the strength of the market.

Perhaps that sounds familiar.

On that note, Deus Ex Macchiato points us to another structured finance blast from the past:

Usually I abhor exclamation marks, but this one seems appropriate. Little noticed by most of the financial press, the first private label US RMBS deal since the crisis closed a little while ago. Dow Jones reports: “The first residential mortgage bond to come to market after the housing bubble burst was sold on Friday to strong investor interest.”

Related links:
Rating re-Remics – FT Alphaville
Re-remicking the crisis – FT Alphaville