The New Exotica on Wall Street

The New Exotica on Wall Street -...

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The New Exotica on Wall Street, 3: Re-REMIC's   Copyright © 2009, Greenwich Financial Management Inc., a registered investment  advisor. Like the legendary snake that swallows its own tail, “Re-REMIC’s draw their collateral  from old REMIC’s. In this final installment of our series on financial innovations, we will  discuss how Wall Street chefs prepare this exotic new dish for investors. Before there were re-REMIC’s, there were REMIC’s. The acronym stands for Real  Estate Mortgage Investment Conduit. The Tax Reform Act of 1986 provided that such  vehicles, if they follow strict rules, are not subject to taxation at the entity level; instead,  the government taxes only the distributions to investors. Eligible REMIC collateral  includes federally backed securities, such as those backed by Ginnie-Mae, Freddie Mac  and Fannie Mae, as well as unguaranteed mortgage “whole loans.” These whole loans  might be, for example, subprime or “Alt-A” mortgages, or high quality “jumbo” size  mortgage loans. REMIC’s typically comprise a series of sequential pay “tranches.” Investment banks  seek an “arbitrage” (versus the cost of buying the collateral) by matching these tranches  carefully to the investment preferences of investors—including maturity, credit rating and  bullish or bearish characteristics. REMIC’s typically include a bottom class, the 
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The New Exotica on Wall Street -...

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