REO MARKET WATCH – AUGUST 09

by B D Fenton

Foreclosures are continuing with no end in sight – all the toxic assets already on the books are choking the banking system and not moving due to value uncertainties. What to do? A little ‘presto-chango’ re-packaging and “RE-REMICs” are born.  Is this something new or just a case of old wine in new bottles?

Investment banks and hedge funds have been doing it for awhile now as a way to salvage some value from mortgage-backed bonds with mixed asset values. In the securitization frenzy driven by the sub prime mortgage boom riskier loans were pooled with high quality ones and sold together as AAA investment grade bonds. Traditionally that meant products of the highest security and equity. In this case the admittedly aggressive new loan products were of such recent origin that not enough time had passed since their inception to fully realize how risky they were. To cash in on the boom they were bundled together with the better bonds and received a higher rating than they could have gotten otherwise.

So good bonds got packaged with the not so good bonds and when the fit hit the shan the buyers found themselves holding some very valuable, some of questionable value and some with little or no value. When real estates values plummeted Moodys and Standard and Poors ratings became unreliable. REO, NPNs and even PN prices were all over the place. Investors were reluctant to buy when values were so difficult to ascertain. The entire market became jumbled as the market continued to tank and nobody knew what the assets were worth.

Once again it took the entrepreneurs to begin to sort it out. They began to ‘carve’up the  product and repackage it into like tranches and resell it. The good stuff was packaged and sold for what it was at fair prices and the riskier pools sold at a discount with the really tough stuff sold for pennies on the dollar. This strategy has been working in fits and starts around the country and now the big boys on WallStreet have taken notice.

They even have a name for it – “RE-REMICs – RE-securitization of Real Estate Mortgage Investment Conduits”. It makes perfect sense. Re-package the assets and sell them for what they are really worth. Create multiple pools of known value out of larger unknown value tranches and sell them to investors with appetites for the different products. The investors are out there. This may be good news for the REO market because it might break up the log jam and send much needed product out into the marketplace.

Get out the crystal balls and start asking. We gotta be close. We are seeing some good action in Texas around the Metro-Plex. There is a lot of interest in the “Inland Empire” in Southern California – areas like Riverside and San Bernadino Counties. Even Michigan is finally cheap enough to lure the brave at heart. The question now is – how close are we to the bottom of the market? The good stuff will get snapped up by the institutions, but are the sellers willing to dump the junk at deep enough discounts to induce the investors to risk taking it off their hands in hopes of making a profit? Will they be able to finally offload it to the really creative investors who have the ability to liquidate it successfully?

New wine in old bottles or a new chance?