The Small Business Job Protection Act of 1996 included, among other things, the establishment of the Financial Asset Securitization Investment Trust (FASIT), a new means of securitizing assets that is similar in intent but goes beyond the Real Estate Mortgage Investment Conduit (REMIC) tool currently used by the real estate industry to tap Wall Street investment capital. When the federal enabling legislation goes into effect this September, the first FASITs are expected to be used to securitize several asset classes, including credit card receivables, auto receivables, and real estate mortgages.
FASITs are not expected to replace other financing tools but will provide an alternative that has significant advantages over the REMIC. FASITs will provide more flexibility in financing owners' projects as well as in developing, selling, or restructuring assets in a portfolio.
More Loans and Flexibility The introduction of FASITs creates new opportunities in the commercial mortgage-backed securities (CMBS) market for financing in all types of commercial real estate. For example, construction financing, recently difficult to obtain and generally not eligible for REMIC securitization, can now be facilitated using a FASIT, thus potentially creating greater liquidity in the construction-loan market.
Short-term commercial financing, such as interim loans and bridge loans, can also be placed in a FASIT with greater efficiency and at a lower cost than using a REMIC structure because the FASIT has the capability to remove or take in additional assets in cases of over-collateralization.
If, for example, a shopping center owner needs to develop and finance a pad site separately from the other property due to over-collateralization, the pad can be pulled out of the overall FASIT structure and sold, developed, or financed in a new way. Under the REMIC structure, an asset change incurs higher costs because the original REMIC has to be killed and a completely new one formed if the assets need to be used differently.
FASITs also provide a mechanism for managing interest-rate and prepayment risks. Portfolios of debt instruments that have defined patterns of principal amortization can be pooled with instruments that have erratic principal amortization in order to smooth interest earnings and make it easier to track and maintain a benchmark rate of return within a defined duration range. Mortgages can be added as needed, thereby eliminating prepayment risk to the investor.
FASITs can also hold hedging instruments such as swaps, options, and futures. …