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October 2nd, 2009

Toxic Asset Relief Program? — No it’s Not TARP

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Hearings in Washington this week have revved up discussion surrounding a proposed plan from Wall Street designed to rid private institutions of their toxic assets. Yesterday we wrote that some home-loan lenders may be finally ready to pick up the pieces and move on; well it seems as though Wall Street firms may be ready to do the same.

Wall Street seems to have found a way to save and make money on these risky investments, but bank regulators are worried that these transactions could lead to a copycat crisis:

The popular deals are known as “re-remic,” which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.

It’s now October, and the same criticisms and skepticisms expressed over a month ago continue to persist. Critics are worried that the rating agencies — who some partially blame for the last credit crisis — will inaccurately rate the securities:

At hearings Wednesday on Capitol Hill focused on the ratings firms, U.S. Rep. Dennis Kucinich (D-Ohio) raised concerns about the mounting number of re-remics, saying, “The credit-rating agencies could be setting us up for problems all over again.”

Regulators would like “a lot fewer dollars” paid to Wall Street, as well as “less reliance on the ratings agencies,” said Kermitt Brooks, first deputy insurance superintendent in New York.

Re-remic volume has really picked up in recent months, an encouraging sign says HSH VP Keith Gumbinger. “If we can actually separate the good from the bad, this could lead to smaller, more manageable losses for firms. To the extent that it frees up capital, more lending can occur — welcome news for potential borrowers.”

A pin-point assessment of just how much of an increase in re-remic is difficult to gauge since most of the transactions aren’t publicly disclosed. However, estimates put re-remic volume in the range of $30-$90 billion for 2009.

It’s really encouraging to see the wheels turning again in the private sector. After two government initiatives (TARP, PPIP) failed at getting toxic assets moving again, our hope is that in the long run this will mean healthier banks and happier customers.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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