Q: What will the RTC's total volume of mortgage-backed securities be when the agency finally closes its doors for good?

A: It depends on when Congress gives us the funding to continue. The current funding delay has obviously restricted the flow of new thrifts into the RTC. It also depends on how many more thrifts ultimately end up with the RTC. We've been going along at a clip of approximately $1.5 billion to $2 billion per month. There may be some decline. But I still see us doing well over $1 billion a month in securities for the foreseeable future.

Q: Won't the RTC have to remain in operation as long as these securities exist?

A: No. All our details are designed to minimize the amount of managerial input from the RTC. In fact, in many of our deals there is no managerial role for the RTC. That's the trustee's job. Currently, we do monitor the deals. But when the RTC closes down, a lot of those functions will be passed on to the Federal Depository Insurance Corp. Most of our deals are [real estate mortgage investment conduit] trusts, so you can't actively manage those assets.

Q: Are the RTC's mortgage-backed securities different from others on the market?

A: Essentially, our securities are nothing radically new. We take like product from a lot of different thrifts, put that product in a trust, and sell participation interests to the public. We call them bonds. But actually, they're like any other mortgage-backed security that people assume.

Q: And a trustee oversees these securities?

A: That's rights. There is a trustee, servicers, and bond administrators. The investors get paid the cash flow coming off the mortgages. The RTC's role is to maintain a cash reserve, which is used for credit enchancement purposes in the event that there are shortfalls.

Reserve funds for issues consisting of single-family mortgages range from 10% to 20% of the issue. And reserve funds for issues consisting of multifamily and commercial mortgages range from 25% to 30%.

Q: The RTC is pioneering the securitization of commercial mortgages. How will the market benefit?

A: Clearly, anything that adds to liquidity is good for lenders and borrowers because improved liquidity facilitates the flow of capital. Any financial program or instrument that's tied to the capital markets will receive more efficient pricing. That's because the markets are very good at allocating capital by using the price mechanism.

If you look at the residential mortgage markets, you might hear people complain about the cost of their mortgage. But you never hear anyone say, "I can't find anyone making mortgages."

They may not like the price, but the capital is always there. That's because residential finance in this country is very well integrated into the capital markets. There's Fannie Mae, and there's Freddie Mac. Markets help establish standards. For example, markets help impose underwriting disciplines because markets can price risk, given enough information.

So we can't help but feel the commercial real estate finance arena will benefit from having closer ties and more direct ties to wider capital markets through securitization.

Q: Any other innovations?

A: Another is the special servicer for our commercial mortgage-backed securities.

With single-family mortgages the management role is very clear-cut. Commercial mortgages are different. Not only do the projects carry more risk, but you've also got a much more sophisticated borrower. Very few people will think of just walking away from their home as a bargaining ploy. But in the commercial arena, people do this type of thing. Also, you're dealing with entities that can go bankrupt. And each deal is unique.

These factors make commercial mortgages that much harder to manage. Thus, we felt there was a need for a party in the transaction that is able to deal with these assets when they become troubled.

If a project starts having problems, you need someone who's got the expertise to go in there to manage those problems. And you don't necessarily want someone doing it for a flat fee, for example, $1,000 or 10 basis points. You want someone with the incentive to minimize expenses and maximize recoveries.

We tried to come up with an incentive-based system that could do that. And we wanted people to specialize. There's a science to it, but there's also an art. So that's why we developed the special servicer, which some private sector people are now adopting.

Q: What else have you done that's new?

A: Another type of innovation that we've brought to all our deals is the type of collateral used.

Previously, securitization was used to liquidate the "pretty" assets. Or it was used to shorten or lengthen the duration of the asset side of a balance sheet. No one talked about securitization in terms of its ability to manage problem assets.

What we've tried to do is to show that securitization is a viable alternative for the management and disposition of troubled assets. By troubled assets, I mean assets that may have poor or missing documentation, or assets that have been delinquent from time to time but are not in foreclosure. Thus, we put troubled assets in our deals, despite the fact that we took a credit hit from the rating agencies.

I want to emphasize here that, number one, I'm talking about performing assets, and number two, I'm talking about seasoned performing assets. We're not talking about junk here.

So rather than take these assets and sell them at fire sale prices, we said, "We'll put them in our deals and establish appropriate reserves against losses on these assets."

We think we best serve the taxpayer by putting troubled assets in our deals and getting paid for them. We set aside risk reserves. And given the seasoning of the product, we don't think on a probability-weighted basis that we're really going to need those reserves.

We've shown the markets that you can successfully securitize troubled assets. This will be useful to banks, thrifts, insurance companies, or whoever holds troubled assets in the future.

One of the things to remember is that the investor wants predictability of cash flow. These assets aren't the majority of our performing assets. About 5% to 20% of our deals consist of troubled assets. Nonetheless, we are pushing the edge of the envelope somewhat to include those assets.

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