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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (63344)	6/11/2006 10:21:56 PM
From: shades	Respond to of 110194

That presumes that the Chinese are the ones buying housing agency issues. Richard Benson said perhaps it would be the saud boys we help keep in power - but how do we really know? Just do a google search on this topic, and it's hard to find much, especially current stories. I will do a search. Here's one talking about "Asian" demand, which appears to be Japanese, which shoots down your theory, but may support mine? Japan has completely stop buying Treasuries, and has shifted totally to agencies. flutrackers.com; All I can think is a treasury is against a taxpayer no - a worthless brittney with no skill other than finding the latest sale at macy's. A debt against a piece of land or property though - that actually has SOME value eh? We wanted the indians land for the most part and didn't care much for taking thier women - had our own right? The same is true elsewhere. FCB buying of t-bills has completely stopped, yet if you watch auctions as closely as I do, you see another pattern. Right when the bond market is in trouble, "FCBs" (or certain FCBs). mysteriously show up and grossly overpay for the most risky issues, like TIPS, and long dated (10s and 30s) bonds, or agencies. Their behavior is now completely bizzarre in fact, just too heavy on risk taking and buying trash. housingpanic.blogspot.com Global bankers working in unison to get the excess liquidity out of the system - all of a sudden. Think Ben's been working the phones? Nice piece by John Mauldin, and note the sea of red ink around the world... The Dow and NASDAQ, while sucking, haven't sucked as much as some others - good god look at that Dubai number - but then again, there's a smoke and mirror bubble market if there ever was one... But why the lockstep? Why is every market down? I think we can look at the change in major central bank policy which began a few months ago and was highlighted in this letter. In short, the central banks of the world are taking liquidity out of the system. It was the providing of massive amounts of liquidity that had driven asset prices around the world to frothy heights, and now we are seeing what happens when that process goes into reverse. It wasn't like we didn't have any warning. They made it very clear. This reminds me of a now prescient paragraph from a speech by Alan Greenspan last August. I thought it was a very important warning then and I do so even more now (emphasis is mine): "Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums." That last sentence has stuck with me. I think about it a lot, and so should you. We are watching risk premiums reassert themselves in markets around the world. This process is hardly over. Freddie Mac hired Bitsberger, the Treasury official who brought back the 30-year bond, as its treasurer and a senior vice president last month. He was the latest high-profile hire for the agency as Chief Executive Richard Syron works to win back investor confidence after revealing $5 billion in accounting errors from 2000 through 2002. So much politics everywhere surrounding those fannie freddie positions. Bitsberger was born in Fukuoka, Japan and spent the first few years of his life here. He visited the country four or five times while he worked at the U.S. Treasury. Yesterday he had lunch with 15 investors yesterday and has four one-to-one meetings set up for his trip to Japan. ``Some of them I have to introduce myself to,'' he said. ``Some of them I know very well.'' Just a good salesman? Perhaps - who has the worse demographic problem and debt challenge? Most old people per capita? USA, Germany, Japan, China, India? Japan doesn't seem to want to import immigrants like we do eh? So perhaps they need to accumulate IOU's from people that are willing to import immigrants. kiplinger.com For 20 years we went through a period of generally falling interest rates and bond yields. Do you think we might be at the beginning of a new long-term period of rising rates and yields? If you look out longer term, what could be the fundamentals? We've got an aging population that is going to start to retire. By 2012, all of a sudden more money is going out of Social Security than coming in. What that means is at the margin, the federal government starts to borrow more money to pay the benefits. Demand for money is going to be increased. Europe faces that same problem to a higher degree -- its social safety net system is more institutionalized than ours. The Japanese government faces the same problem. It has an older population. So if the demand for borrowing increases on a global scale, why wouldn't the cost of it increase? That's not something that happens tomorrow. It happens a little more each year. But if you're thinking in terms of 20 and 30 years, it is a secular shift that is going on. That is a reasonable conclusion to come to.

To: russwinter who wrote (63344)	6/12/2006 6:43:14 AM
From: shades	Respond to of 110194

DTCC tackles securities processing problems globalinvestormagazine.com By Claire Milhench The Depository Trust & Clearing Corporation (DTCC) has today issued a white paper outlining a series of new initiatives aimed at solving the processing problems of the structured securities market. The initiatives will affect collateralised mortgage obligations (CMOs) and other asset-backed securities (ABS). CMOs are bonds backed by a pool of mortgage loans and issued by various organisations, such as the US-based Fannie Mae and Freddie Mac, investment banks and insurance companies. Asset-backed securities are structured bonds or notes backed by loan payments or accounts receivable such as credit cards or auto loans. "CMOs and ABS have shown rapid growth in the last several years," said James Balbo, managing director of asset services for DTCC. "The average monthly distribution of principal and interest for these securities by The Depository Trust Company, DTCC's depository, grew from US$9.5 billion in 2001 to $52.5 billion in 2005." This has created an increasing number of processing challenges, with late and inaccurate notifications of payment rates for these issues continuing to pose a major problem for the industry. DTCC first discussed CMO and ABS processing in a white paper issued to the industry in 2003. Although the depository and paying agents - those agents who distribute the monthly principal and interest (P&I) payments - have implemented automation and process improvements in the last two years, little progress has been achieved in improving the accuracy of CMO/ABS payment processing, according to DTCC's latest paper. "Thousands of these transactions fail to be processed in an accurate and timely manner each year. Last year alone, more than 5,300 CMO or ABS transactions had to be adjusted or reversed after payment," Balbo said. "This paper outlines steps to improve and expedite processing capabilities in 2006 and calls upon the industry to help resolve this difficult and growing problem." DTCC believes that the problem is structural, involving many different parties who add and forward information on principal and interest (P&I) payments. The problem can only be solved through a concerted industry effort to change the terms of the deal structures and the time frame given to those involved in the payment process, according to the paper. "Working with leading industry groups including The Bond Market Association (TBMA) and the American Securitisation Forum (ASF), DTCC will form a committee to investigate the root causes of the processing problems affecting structured securities," said Balbo. "Together we will make industry-wide recommendations and monitor implementation of those recommendations." Some of the targets include expanding the distribution of monthly agent performance report card beyond the agency community. Currently, DTCC works with major paying agents and together they use the report cards to examine processing and performance problems. The data in these cards can be used to create similar report cards for service providers in other industry segments to help them improve efficiencies and meet new regulatory requirements. DTCC also wants to create a time limit for late adjustment and implement financial disincentives for failure to comply with established industry standards for accuracy and timeliness.

To: russwinter who wrote (63344)	6/12/2006 7:50:10 AM
From: shades	Read Replies (1) \| Respond to of 110194

What exactly is a REMIC? How can they be used in funny accounting games? These asians are buying them up - now didn't they buy up commercial property in the 80's and lose thier butt Russ? Are memories short? Doing an SI search on REMIC turns up little - grey goo and myself have a few posts. Google is better. finance.senate.gov As a further illustration of the Tax Transactions, Enron also engaged in two transactions involving acquisition of REMIC Residual Interests that had the effect of distorting Enron’s financial statements.30 As this Committee knows from other hearings, a REMIC is a tax vehicle created by Congress to permit bona-fide investment in mortgage securities.31 REMIC Residual Interests are securities issued by REMICs that generate so-called “Phantom Income” for tax purposes in the early years of a REMIC and “Phantom Loss” in the later years of the REMIC.32 Enron entered into the Steele and Cochise Transactions to acquire REMIC Residual Interests in transactions in which it could take advange of future Phantom Losses from the REMICs without ever having reported the related Phantom Income.33 More importantly, the transactions were designed to record deferred tax assets related to the future losses and to reflect the recognition of offsetting deferred credits as pre-tax book income.34 The Examiner concluded that an existing Internal Revenue Code antiabuse provision probably can be relied upon by the IRS to disallow the tax benefits of the transaction. 35 The Examiner also concluded that portraying the income from the transactions as pre-tax income (rather than a reduction of tax expense) without disclosure of the nature of the purported pre-tax income was misleading and violated GAAP.36 During the period from 1997 through September, 2001, Enron amortized $144 million of pre-tax income through its reported financial statements, which amounts actually were items reflecting the anticipated future tax benefits from acquired REMIC Phantom Losses.37 In total, Enron created $886.5 million of net income benefits from the Tax Transactions through September 2001, and it was projecting in excess of $1.7 billion of net income benefits over the lifetime of the transactions.38 In addition, these transactions were disclosed in Enron’s financial statements in a misleading manner.39 Seven of Tax Transactions were promoted to Enron by investment banking units of major banks.40 The investment banking firms received fees, ranging from $6 million to $15 million dollars, for advising on the Enron Tax Transactions.41 Three of the Tax Transactions were brought to Enron by major public accounting firms.42 One transaction was implemented internally by Enron based on the pattern of a prior transaction that it had implemented on the advice of a public accounting firm. 43 In order to market the transactions to Enron, the investment banks found that it was helpful to obtain the opinion of a major accounting firm that the expected accounting treatment complied with GAAP. In certain circumstances, accounting firms will issue socalled SAS 50 letters describing the applicable accounting treatment of a hypothetical transaction to an investment banking firm that is promoting a transaction. 44 In many of the Tax Transactions, Andersen had been separately engaged by the investment banking firm that was promoting the transaction to develop the SAS 50 letter on the underlying hypothetical transactions, and then advised Enron on the accounting treatment of the transactions as actually implemented. (a bank failure involving remic's) banking.senate.gov The O/C assets are a credit enhancement on the securitizations pledged for the benefit of the REMIC bond insurer and trustee. E&Y provided an unqualified audit opinion even though management erroneously accelerated the receipt of the estimated cash flows from the underlying loans related to the O/C assets. These cash flows would not be released by the trustee and received and retained by Superior until much later in the life of the REMIC trusts. This error caused Superior to report inflated assets, earnings and capital. Combined with other valuation adjustments, the examiners estimated an appropriate write-down of the residual assets might exceed $200 million. securitization.net The process by which a servicer, after a property has become REO, sells the property. Under the REMIC statutes that govern CMBS, the property has to be sold within three years. The worst possible outcome, which Jones said is unlikely, is that many CMBS sellers might have to revise audited financials for years beginning in 2000, reversing gains on sales and adding billions in assets and liabilities to balance sheets, while B piece buyers would be obliged to consolidate the same billions of dollars of loans and attendant debt onto their balance sheets. "This would be bad," he said. Jones is hopeful that new guidance will address the concerns and permit the CMBS business to continue to operate efficiently. So far, audits have been going through and business is going on as usual in the CMBS market. "Such an analysis is a horror show in the real world," Jones said. senate.gov A REMIC is a fixed pool of qualified mortgages and other permitted investments that is not subject to taxation as its income is passed-through to its interest holders. A qualified mortgage includes obligations that are principally secured by an interest in real property and are transferred to the REMIC on the startup day or are purchased by the REMIC. Currently, certain transactions, including modifications of existing property are subject to a 100-percent tax. This has the effect of limiting the ability of real estate owners to make improvements on individual parts of their property. The REMIC Modernization Act would simply update the tax code, which has remained unchanged for twenty years, allowing property owners to make needed improvements and upgrades without incurring heavy tax penalties. cadwalader.com Finally, the Act contains a somewhat bizarrely drafted provision that reads as though a REMIC can hold up to 49.9% of any type of debt instrument (such as corporate debt or non-real property loans) as long as more than 50% of the obligations transferred to the REMIC are obligations of the United States or any State (or a political subdivision, agency or instrumentality) and are principally secured by an interest in real property. This was probably intended to refer to a whole pool of government business loans, such as SBA loans or state equivalents, which are typically secured by a combination of real estate and other assets. The legislative history does not clarify this drafting problem, so it may be true that REMICs are intended to turn into CDOs as long as more than half their assets are SBA loans. However, the utility of this provision for anything other than 100% SBA-type loans is highly limited until the statutory intent can be clarified. ginniemae.gov REMIC Structures The REMIC security appeals to a broader base of investors than traditional MBS due to its flexibility in bringing investment opportunities with different risk-reward levels and investment horizons to institutional investors. Many tranches are designed to reduce an investor's prepayment risk, while others increase risk but offer higher potential yields. The tranche types discussed below are named for their general characteristics and should be closely evaluated on performance under different economic conditions. efanniemae.com Holders of multifamily mortgages can exchange their loans for Fannie Mae REMIC certificates and in so doing can get relief from any risk-based capital, GAAP, or other accounting and regulatory requirements. This is accomplished by transferring the risk of loss on the underlying mortgages to a third party through the sale of the senior guaranteed certificates and the junior or subordinate certificates. bdo.com REMIC Characteristics and Advantages A REMIC is a tax structure offering several advantages not previously available in MBS offerings. These are summarized below: Entities electing REMIC status are not taxable at the entity level. REMIC securities can be classified as either asset sales or collateralized debt, thus allowing issuers to choose between removing or retaining debt from their balance sheets. REMICs offer the same tax advantages for any type of legal entity (e.g., limited partnerships, corporations or trusts) electing REMIC status. Prior to the REMIC structure, a multi-class CMO could avoid double taxation only by using a business trust, which had the significant disadvantage of imposing personal liability on the security holders (beneficiaries of the trust). REMICs improve on the efficiency of multi-class securitization offerings by adding three enhancements to the CMO structure: (1) removal of the 2 percent over-collateralization equity requirement on CMO issues; (2) provision of issues with monthly payment schedules; and (3) provision of guaranteed interest contracts (GICs) on short-term reinvestment cash flows held by the REMIC.

To: russwinter who wrote (63344)	6/12/2006 8:00:07 AM
From: shades	Respond to of 110194

Practical Implications of REMICs For Troubled Loans hotel-online.com The practical implications of securitization can be profound. Compared to traditional pre-CMBS models, securitized loans invoke different players, documentation, structures and inflexible tax rules. These differences affect the incentive, ability, and willingness to workout or liquidate troubled loans. Most of the CMBS vehicles are REMICs. This REMIC status is crucial to the securitization market, because the REMIC status assures bondholders that the trust will be a pass through entity for tax purposes, avoiding a devastating double tax if the loan pool or trust were to be taxed as well. REMIC status is gained by compliance with complex and rigid rules that prohibit prepayments (unless executed in accordance with defeasance procedures) and sales or exchanges of mortgages in the trust, including modifications to the mortgages, unless in compliance with very strict guidelines. These tax-driven mandates severely limit when and what a Special Servicer can do when a loan is in trouble. The REMIC rules, pooling and servicing agreement, and loans documents provide a strict regimen for securitized troubled debt. Failure to strictly observe these rules is the tax equivalent of Armageddon for REMIC investors, servicers and other participants. Here are a dozen differences in REMIC workouts: The loan will be serviced by several companies with whom the borrower probably has no relationship. The friendly, local banker or mortgage banker looking to future business with the borrower will have little or nothing to do with the securitized loan. Servicers will follow and enforce precisely the strict letter of the loan documents. Servicers will also administer the loan in strict conformance with other agreements or standards that the borrower may never have seen such as the pooling and servicing agreement, REMIC rules, and accounting standards (FASB 140). Multiple servicers confuse many borrowers who often have trouble finding out to whom to talk, what authority the Master Servicer and Special Servicer may have, and when to talk to each. In addition to the Master Servicer and Special Servicer, there may be sub-servicers. Releasing any collateral is problematic once the loan is securitized. Additional advances are impossible unless specifically provided for in the original loan documents (and by an objective standard or schedule). Once put in the pool, loans cannot be materially modified before default or imminent default. Servicers will enforce financial, data and other seemingly technical requirements of the loan documents. A lender will not have the discretion to permit a borrower to substitute alternate mortgage or real estate collateral, generally speaking. Transfers of the underlying property and assumption of the mortgage may be permitted, but usually only on one occasion, if permitted by the loan documents, and pursuant to a clearly defined process and set of conditions. Further encumbrance is usually prohibited in conduit loans without the consent of the lender, and is likely to be prohibited altogether. And where prohibited, the REMIC will have virtually no flexibility to accommodate the further encumbrance of the property. Prepayments on debt held by REMICs is generally prohibited, unless specifically authorized in the loan documents, and when permitted will usually be conditioned on defeasance. Defeasance is expensive and time consuming. REMICs are likely to favor foreclosure over workouts. Foreclosure will be the relatively safe alternative for servicers charged under the pooling and servicing agreement with a standard of care, preservation of the REMIC status and choosing the alternative which will maximize net present value (without using subjective judgments and input). With the REMIC’s loan on transfer and yield maintenance, it may be difficult to cleanly establish that a workout would produce a larger net present value than a foreclosure. Conclusion REMICs have changed the landscape of commercial real estate finance forever. We will soon see how they will change the processing of troubled loans. The complexities of the structure make it imperative for all parties to know what they are doing. If borrowers are to succeed in workouts, they must solve the maze to find the right party to whom they should talk, and know how to present options that are within the power and prerogatives of the servicer.