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us_fsi_Sec_RE_Speaking%20of%20Securitization-June%202009 -...

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June 2009 Speaking of Securitization Accounting, tax, regulatory, and other developments affecting transfers and servicing of financial assets The RE-REMIC phenomenon: Is it a regulatory capital play? Is it a defensive play against further ratings downgrades? Is it a tax-advantaged transaction? Is it a cost-efficient funding strategy for the new AAA securities? Is there an economic trading arbitrage? Does it make AAA bonds more saleable? Sometimes the impetus for a RE-REMIC 1 is one or more of the factors listed above, and in rare circumstances, all of the above. Given the paucity of any new primary issuances in the mortgage securitization market and the yet-to-develop traction in government strategies to revive mortgage securitization, just about the only non-agency game in town are RE-REMIC transactions, and there is no shortage of supply. This paper will summarize technical accounting, regulatory, and tax issues that apply to these transactions. The paper does not address the credit re-rating analysis or any economic valuation of the sum of the parts in relation to the whole. Because the technical accounting and regulatory developments outlined herein are very fast- moving, readers should be aware that this paper might not represent the up-to-date status of these matters as of the date of their reading. The mechanics of the RE-REMIC process In its simplest form, an investor transfers ownership of one or more RMBS bonds 2 to a special-purpose entity (the “depositor”) (often wholly owned by a dealer) which in turn transfers the bonds to a newly formed trust created specifically to issue the top-deal RE-REMIC securities. Typically, to achieve economies of scale, multiple RMBS bonds are put into the trust that issues the RE-REMIC securities. A trustee is appointed and receives the cash distributions on the underlying securities and makes the cash distributions to the holders of the RE-REMIC securities (typically with a one-day delay, but might vary between zero and three days, depending on arrangements with trustee). The RE-REMIC securities can be as simple as two pro rata pay classes 3 with realized losses allocated first to the subordinated class and then to the senior class, or the RE-REMIC structure could have multiple sequential pay classes and more complex interest and principal waterfalls and exchangeable features to capitalize on future upgrades or downgrades. When there are multiple RMBS bonds placed in the REMIC, most often a separate bond “group” is created for each of the underlying RMBS bonds (for example, 40 underlying RMBS supporting 80 senior/support classes) and a separate REMIC election is made for each group. There is typically no cross- collateralization across the RE-REMIC groups; however, super-senior classes can be 1 RE-REMIC stands for resecuritization of real estate mortgage investment conduit securities. Since REMIC is only a tax construct, not all resecuritizations of RMBS are RE-REMICs (some are grantor trusts; some are owner trusts issuing debt for tax).
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