Securities Industry Eyes Shortcut to Wider Market in Secondary Mortgages
LaGesse, David, American Banker
NEW YORK -- leaders of the securities industry are considering a legislative shortcut to broaden secondary mortgage markets, based on a controversial concept introduced this year by Dean Witter Reynolds Inc.
Investment bankers are looking at the potential of a quick change in tax laws to allow coupon-stripping on mortgage securities, much as Dean Witter did in a $1 billion issue this year.
The Internal Revenue Service shut down the second half of that Dean Witter issue in april. Hours before the second $500 million went to market, the IRS proposed retroactive regulations that would specifically outlaw coupon stripping on mortgage securities.
In coupon stripping, investment bankers break the payment stream from a bond, normally a U.S. Treasury security, into two or more classes of maturity. Investors are willing to pay more for the maturity class that matches their investment needs, thus making the separated payment streams more valuable than the bond itself.
Dean Witter officials consider their instrument the most efficient security for selling mortgages to hit the market, and want to save it. They currently are sitting on $500 million in mortgage securities that Dean Witter bought to back the multiclass issue in april and are scrambling to hedge those loans while seeking grandfather rights from the IRS.
Officials at Dean Witter, a subsidiary of Sears, Roebuck and Co., also are drumming up opposition to the IRS for next month's hearings on the proposed regulations.
"We've sent out some 75 information packages to institutions and lobbying groups to explain this inequity," said William Vasu, managing director at Dean Witter. Easier Way to TIM Benefits?
Now the security industry is going on the offensive and is wondering whether Dean witter's concept could provide many of the benefits of the more complex Trusts for Investments in Mortgages (TIM) legislation.
"This is one way that gets you a lot of the same effects of TIMs without all the weighty issues that have bogged TIMs down," said William McCauley, vice president of First Boston Corp., a leading investment banker in mortgage securities.
TIMs originally surfaced as a series of proposals from a presidential commission on how to encourage investment in residential housing. Related issues, such as what to do with the federal agencies at the center of the secondary mortgage market, have bogged down the concept for several years.
Investment bankers have proposed a legislative end-run around the TIMs controversy by going for quick authorization of the Dean Witter structure. …