Magazine article American Banker

Competition and Refi Boom Put Remic Market in Orbit

Magazine article American Banker

Competition and Refi Boom Put Remic Market in Orbit

Article excerpt

An already strong market for real estate mortgage investment conduits has become scorching hot this year, with Fannie Mae and Freddie Mac dueling to set records for deal size.

Last week Freddie Mac issued a $5 billion Remic, the largest ever. It broke a record set just one month earlier, when Fannie Mae closed a deal just over $4 billion in size.

Remic issuance increased from about $25.5 billion in 1995 to more than $148.1 billion in 1997, according to Securities Data Co. This year more than $103.9 billion of Remics have already hit the market.

"It's all driven by demand for specific types of cash flows," said Jeffrey Perlowitz, managing director at Salomon Smith Barney, the leading underwriter of Remics this year.

A Remic is a type of collateralized mortgage obligation that is structured to exempt issuers from taxes at the trust level. It enables the issuer to direct the principal and interest payments generated by the underlying mortgages to different tranches of securities, each addressing specific investment goals.

Investors are willing to pay for the specific cash flows offered by the Remics, Mr. Perlowitz said.

After a big rise in lending from 1994 through 1996, Mr. Perlowitz said, there is "a pretty big recycling of mortgages going on because of the high amount of prepayments."

Investors are getting cash back as consumers prepay loans, and are finding an opportunity to reinvest in Remics. And insurance companies and other big mortgage securities investors can use some classes of Remics to hedge their prepayment risk. …

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