Foreign Investors Intrigued By |Ritzy Mae' Offerings

The often lumbering Resolution Trust Corp. is using some fancy footwork in its mortgage securitization program.

This week, the bailout agency piqued the interest of foreign investors with some unusual packaging of adjustable-rate mortgages. The rates on the loans are linked to an index of thrifts' costs of funds - but the payments to securities holders move with the London interbank offered rate, or Libor.

"As far as we know, this is the first deal that involves an interest-index conversion," said Michael Jungman, the RTC's assistant general counsel for securities and finance.

The $580 million package, marking the bailout agency's second mortgage securitization, sold out quickly on Tuesday. Demand came not only from the United States but from Europe and Japan, said Frederick O. Terrell, a director at First Boston Corp., which was lead manager of the offering.

The RTC, which holds about $40 billion of home mortgages through failed thrifts, kicked off its securitization program last month. Known informally as Ritzy Mae, the program is for loans that are either too large or too quirky to sell to the federally chartered secondary market agencies.

The loans backing the latest issue came from three failed thrifts in California: Columbia Savings and Loan Association, County Bank, and Santa Barbara Savings and Loan Association.

As Ritzy Mae approaches its issuance target of $1 billion a month, the interest-conversion feature is almost sure to be used again.

That is because many of the loans of seized thrifts, like those in the latest deal, are adjustables tied to an index of western thrifts' funding costs. And the demand for securities pegged to that index comes mainly from the U.S. thrift industry, Mr. Jungman said.

The RTC's supply of mortgages tied to the index requires the agency to find a broader base of investors, he said. One way to do that is to package the thrift-index loans as instruments pegged to Libor, a favored rate among a variety of institutional investors.

Risk of Index, Libor Diverging

The risk to the RTC is that the thrift index and Libor may diverge in unexpected ways. For example, a sharp rise in Libor relative to the thrift index could leave the RTC paying more to securities holders than it receives from homeowners.

To cover that risk, the RTC is setting up an unusually large reserve fund for the issue. The fund, created with proceeds from the sale, is expected to stand at 20% of the issue, versus 12% for the RTC's first offering of mortgage-backeds.

As an additional safeguard, the rates on the securities cannot rise above 11.5%, well below the caps on the underlying mortgages.

Consequently, the deal is expected to be be graded triple-A by the principal rating agencies.

The largest part of the issue, representing $437 billion in principal, was priced at part to yield 55 basis points over one-month Libor. The securities have an average life of 2.1 years.

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