Repackaged Mortgage Garbage Is Still Garbage

Bloomberg is reporting Deutsche Bank Unit May Begin Repackaging Its Mortgage Bonds.

Deutsche Bank AG's asset management business may join other firms in repackaging their home-loan bonds into new securities without creating collateralized debt obligations, which are being shunned by investors.

The unit of the Frankfurt-based bank has studied using the technique on bonds in the portfolios it oversees, Julian Evans, a director who helps manage insurer money at Deutsche Asset Management, said in an interview yesterday. Bankers including Goldman Sachs Group Inc. and JPMorgan Chase & Co. have created more than $5 billion of new home-loan securities called Re-REMICs out of existing ones this year, newsletter Inside MBS & ABS says.

By slicing up securities and creating new ones less exposed to loan defaults, the deals can raise the odds some of the debt will retain top ratings or appeal to buyers wary of downgrades or losses amid the U.S. housing slump. Securities firms are mostly repackaging their inventories rather than bonds held in outside funds, according to executives at Deutsche Asset Management.

"It's what financial engineering and securitization is all about: It's taking something nobody wants and creating something people will want, be able to finance, or able to hold,'' said James Grady, a managing director at the New York-based unit, which has $240 billion of fixed-income assets under management.

Re-REMIC issuance so far this year is near the pace that led to a record $25 billion in issuance last year. There have been no CDOs composed of mortgage bonds created this year, down from about $500 billion last year, according to JPMorgan Chase.

A "chief goal" of Re-REMIC deals this year has been to turn a portion of the underlying mortgage-bond balances into debt that won't suffer downgrades from the AAA ratings needed by some types of holders, UBS AG analysts said in a report earlier this month. Institutional Credit Partners LLC, a New York-based asset manager, has done six Re-REMIC deals in the past two months, according to Chief Executive Officer Thomas Priore.

Growth Potential

REMICs are real estate mortgage investment conduits, the tax-exempt vehicles used to turn mortgages into bonds by passing payments from the loans to different investors in varying orders of priority or at different times. Re-REMICs repackage some of those securities or a single class into new bonds in which payments are also directed in different ways.

More Financial Engineering

"It's what financial engineering and securitization is all about: It's taking something nobody wants and creating something people will want, be able to finance, or able to hold."

Excuse me for being cynical but isn't that what CDOs, CMOs, and arguably the Fed sponsored TAF, PDLF, TSLF swap-o-ramas were supposed to do? (See Fed Is Not King Midas for the Fed's non-solution to the problem). The misguided and now disproved theory on swap-o-ramas was that if the Fed was willing to take it someone else might too.

Furthermore, weren't the senior tranches of those CDOs supposed to be safe? Now we are taking existing garbage, and repackaging it as something called "Re-REMIC" and people are supposed to want to buy it? Perhaps they will but how many times can suckers be fooled with all this financial engineering?

Given that there was $500 billion of mortgage CDOs sold to fools last year, and none this year vs. a mere $25 billion in issuance of Re-REMICs, it does appear that there is a healthy bit skepticism towards this latest product. Rightfully so.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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