naked capitalism

Doc Guru says:

NAR has joined an industry group coalition, that include the Mortgage Bankers Association, the Real Estate Roundtable and others to urge the IRS to modify the REMIC rules to allow common modifications to collateral so long as the basic terms of the securitized loan do not change. On April 30th, the REMIC coalition submitted comments to the IRS in response to notice 2007-17 on how the REMIC regulations can be improved. The main points made include: 1) allowing collateral modification, 2) allowing prepayment of the loan, 3)allowing the addition or substitution of an obligor.

What became of this?

Doc Guru

doc guru says:

Proposed IRS Regulations Would Modify REMIC Loan Rules
Nov 9, 2007

This week the Internal Revenue Service issued proposed regulations updating the rules for modifications of loans held in real estate mortgage investment conduits–or REMICs, according to a legal alert by the Law firm Kilpatrick Stockton L.L.P. A significant modification could make a loan no longer a “qualified mortgage,” which could disqualify the REMIC that holds the loan or subject the REMIC to tax, the law firm has advised. The proposed regulations are designed to expand the class of permitted modifications of securitized loans.Current rules have four exceptions to the rule prohibiting significant modifications of loans held in REMICs. The proposed rules would add to these: Modifications that release, substitute, add or alter a substantial amount of collateral for, a guarantee on, or other credit enhancement for the loan; and modifications that change the recourse or non-recourse nature of the loan. For servicers dealing with performing loan requests, the biggest impact of the proposed regulations would relate to collateral changes. Under the current rules, modifications that affect a “substantial amount” of the collateral for a securitized non-recourse loan could result in a significant modification of that loan. Under the proposed regulations, such a modification would not cause an adverse REMIC event so long as the loan continues to be “principally secured by” an interest in real property following the modification.

http://www.commercialpropertynews.com/cpn/content_display/finance/investment-banking/e3i5eca1b5094193b55919d22eae5f94366

doc guru says:

From Fitch, Re: Subprime Feeeze as it might also relate to REMIC/RBMS/CDOs, etc (yield enhancements):

Excess interest is an important source of credit enhancement which compensates for loss of cash flow due to mortgage losses. Uncertainty around the benefit of loan modifications is centered on the relative reduction in loss, versus reduction in excess interest that could be incurred. On balance, Fitch believes that stabilization of loss rates can outweigh excess interest reduction when analyzing the impact on senior RMBS. Greater refinancing opportunity can also help senior bond performance, as it will cause those bonds to prepay and reduce the risk of principal loss.

For subordinated RMBS, excess interest is a much greater component of credit enhancement, and in some instances only substantially lower loss rates would offset a reduction in excess interest.

Fitch also noted the potential problems associated with slowing repayments, sort of the “default later, instead of defaulting now” issue. HW readers who read an earlier post (”More on the Bailout: Tripping on the Trigger“) will remember a discussion of how excess interest is released to subordinate bondholders as a deal matures over time. Fitch notes that because the rate freeze essentially keeps borrowers in an “unseasoned” state, traditional loss assumptions around deal seasoning may not hold up over time — doubly so if you consider the potentially substantial decreases in housing prices that could occur between now and then.

For more information, visit http://www.fitchratings.com

Ginger Yellow says:

That’s a pretty poor article, actually, and I say that as someone who has become very skeptical of MLEC. The central point, that the ideal solution is for banks to pony up a liquidity line for their own SIVs, is indeed correct. But many SIVs are not sponosored by banks, and Citi has told shareholders it will not take any action requiring it to consolidate the SIVs.

On to specifics:

“The restriction is needed to prevent the whole exercise from turning into a risk-free bail-out of failed investments. But it will not stop jittery SIV investors from unloading junk-rated assets faster than you can say “asset-backed”.”

What’s he trying to say here? SIVs can’t fund their senior debt at the moment, outside their sponsors anyway. It makes no difference in the short to medium term whether or not investors in SIV paper sell their holdings. The idea is to provide a replacement source of liquidity for the assets, so that redemptions can be met without a firesale.

“As an independent asset manager, BlackRock ought to advise the fund to buy SIV paper at the best price.

If that happens to be the very low one the market currently ascribes to this stuff, why should the super fund bid it higher?”

Again, the idea isn’t to avoid current market prices, but the prices that would follow a firesale. This is a critical difference. SIV assets have been sold on average only 1.6% below par, according to Fitch. If they have a firesale, the price will be much lower. Obviously, SIV sponsors will want a higher price than MLEC sponsors, and there are conflict issues where the two are the same, but Guerrera’s comments don’t address that.

“
As for “systemic banking risk”, there isn’t any. Most of these assets are owned by hedge funds, not banks, one of the reasons why SIVs were off balance sheet in the first place.

A large sale of SIV paper, which does include bank debt, would increase Wall Street’s cost of capital and damage its reputation. But it would not break a bank.”

This is very confused. The nature of SIV assets has nothing to do with why they’re off balance sheet. That’s to do with who owns the capital notes, or in the case of restructured SIVs, who provides the liquidity. Citi taking its SIVs on balance sheet wouldn’t break it, and it probably should take it back on – but again, it’s already promised its shareholders it wouldn’t, and you can hardly blame them for not wanting to take another large balance sheet when they have no contractual obligation to do so. And bringing SIVs and ABCP vehicles on balance sheet did break two German banks.

“Such a head-in-the-sand approach could have dire consequences. The financiers and politicos appear oblivious to the possibility that the fund could fail to buy enough SIV assets. Forget a fire sale, how would they like a “backfire sale” as their fund flounders?

If US banks really want to shore up market sentiment they should follow HSBC, Standard Chartered and Rabobank and use their own cash to rescue their SIVs.”

They are, to a certain extent. Citi is stumping up capital and liquidity for MLEC as other banks are. But again, what about the non-bank SIVs, or the ones sponsored by smaller banks? If those go under, that damages the larger banks’ SIVs. That’s what they’re trying to avoid.

I think the plan is going to founder on the lack of appetite among investors for credit arbitrage ABCP (as opposed to multiseller vehicles used for client financing). But the argument made here are off base.

Ginger Yellow says:

“Similarly, another article in the FT said that Citi now might not use the MLEC given its fee structure. “

Citi have said from the beginning that they didn’t plan to use it for their SIVs. If anything, the deterioration in NAVs for Citi’s SIVs has made it more likely they will.
“In addition, smaller SIVs such as Cheyne have been liquidating, and I haven’t seen any reports that their sales have been disruptive. So I would think smaller banks could let smaller SIVs fail, or have them liquidate some of their assets and support the rest to attenuate the sale process.”

There’s liquidiating and there’s liqidating. All SIVs, apart maybe from Gordian Knot’s Sigma and Theta which operate on a different model, have been selling assets for most of the year. But even Cheyne hasn’t had a firesale – the receiver has allowed time for a restructuring/orderly sale. The firesale risk comes less from defaulting SIVs, but from SIVs trying to meet their senior liabilities without defaulting. There’s also the risk that other receivers will be less accommodating. As for whether their sales have been disruptive, European prime RMBS spreads rallied to the mid 20s at the end of September, and are now in the 70s. Interpret that how you will.

“Even though the IKB collapse was due to the failure of its conduit Rhineland which some commentators have called an SIV, its structure was not like that of typical SIVs and therefore I believe the term has been too broadly applied”

Agreed. It annoys the hell out of me when people call MLEC a Super-SIV. The whole ideais that it’s not a SIV but a credit arbitrage conduit. My point was that the restructurings effected by HSBC, WestLB and others, and recommended in the FT article for US banks, involve providing full liquidity to SIVs even where there is no contractual obligation (it should be noted that Citi has provided $10bn of such liquidity to its SIVs). In the case of smaller banks, this could well have a material impact on capital.

“my understanding is the compensating mechanism is the restrictions put on the vehicle when NAVs drop below certain trigger points.”

It’s not just that. SIVs have 5 and 15 day net cash outflow tests, which require them to have enough liquid assets (as defined in the transaction documents) to redeem all outgoings for those periods over the next year.