Competition and Refi Boom Put Remic Market in Orbit

An already strong market for real estate mortgage investment conduits has become scorching hot this year, with Fannie Mae and Freddie Mac dueling to set records for deal size.

Last week Freddie Mac issued a $5 billion Remic, the largest ever. It broke a record set just one month earlier, when Fannie Mae closed a deal just over $4 billion in size.

Remic issuance increased from about $25.5 billion in 1995 to more than $148.1 billion in 1997, according to Securities Data Co. This year more than $103.9 billion of Remics have already hit the market.

"It's all driven by demand for specific types of cash flows," said Jeffrey Perlowitz, managing director at Salomon Smith Barney, the leading underwriter of Remics this year.

A Remic is a type of collateralized mortgage obligation that is structured to exempt issuers from taxes at the trust level. It enables the issuer to direct the principal and interest payments generated by the underlying mortgages to different tranches of securities, each addressing specific investment goals.

Investors are willing to pay for the specific cash flows offered by the Remics, Mr. Perlowitz said.

After a big rise in lending from 1994 through 1996, Mr. Perlowitz said, there is "a pretty big recycling of mortgages going on because of the high amount of prepayments."

Investors are getting cash back as consumers prepay loans, and are finding an opportunity to reinvest in Remics. And insurance companies and other big mortgage securities investors can use some classes of Remics to hedge their prepayment risk.

Competition between Fannie and Freddie and among Wall Street underwriters is spurring growth of the market.

Wall Street underwriters do large deals to save on fees to the two mortgage agencies. Once a Remic offer is brought to market, a snowball effect can occur, creating deals within the deal.

Mr. Perlowitz forecasts continued interest in the structured securities, and noted that secondary trading has been robust as well.

Salomon Smith Barney has brought 32 deals to market for a total of $16.4 billion this year, representing a 15.8% market share, according to Securities Data. The record-setting Freddie Mac deal was among the firm's offerings.

Since 1987, Fannie Mae has issued more than 1,500 Remic transactions totaling more than $730 billion, a spokeswoman said. Freddie Mac has issued $680 billion since 1988, when it began its Remic program, a spokeswoman said.

Goldman Sachs underwrote Fannie Mae's Remic in mid-April. Goldman is ranked third, with 23 Remic issues for the year to date, totaling more than $10.7 billion and giving the investment bank a 10.4% market share.

Lehman Brothers is ranked second, with almost $11.3 billion in proceeds for 1998 and 27 issues, giving the firm 10.9% market share for Remics.

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