Fitch: RE-REMIC Structures Vary

MBA (8/25/2008 ) MBA Staff
A report from Fitch Ratings, New York, says investor concerns over rating stability in U.S. residential mortgage-backed securities have led to a renewed interest in re-securitization to provide additional credit protection.
The structural features of these re-securitizations, known as re-real estate mortgage investment conduits or “Re-REMICs,” greatly influences the degree of additional protection provided, according to the Fitch report, Re-REMICs: Why Structure Matters: A Closer Look at Sequential Pay and Pro Rata Pay Structures.

Fitch Director Wen Hsu said the analysis of new re-REMIC transactions that have come to market in recent months conclude that selection of a sequential versus pro-rata pay structure provides more protection against stress on the underlying mortgages, unless offset with additional credit enhancement.

“For protection equivalent to sequential structures, a pro-rata pay structure may need over two times more credit support from the subordinate bond, due to its sensitivity to the prepayment and loss timing assumptions used in modeling,” Hsu said. “In contrast, credit support for a sequential pay structure is driven by potential future losses and is not influenced by different prepayment or loss timing assumptions.”

Fitch said rated re-REMIC transactions will reflect the appropriate credit support for re-REMIC bonds according to the deal structures from both the underlying deals as well as for the re-REMICs.