U.S. mortgage bonds find new life in restructurings

By Al Yoon - Analysis

NEW YORK (Reuters) - The U.S. mortgage bond business at the heart of the global financial crisis is seeing a resurrection of sorts as dealers go back to work on hundreds of faulty securities issued during the heyday of easy credit.

Dealers such as JPMorgan (JPM.N) and Credit Suisse (CSGN.VX) this quarter likely tripled restructurings of old residential and commercial mortgage-backed securities, and are projecting growth as the vagaries of the U.S. real estate slump, the recession and ratings downgrades pummel portfolios of banks and insurance companies.

The business is largely driven by rating companies including Standard & Poor's and Fitch Ratings whose downgrades have progressed from subprime mortgages to prime residential and commercial loans. Lower ratings on securities can translate into losses and taint the health of investors.

As the value of the assets backing the securities has plummeted, the risk to investors has exploded. Now, dealers are seeing that as an opportunity to go back to the drawing board to recast potentially trillions of dollars in securities into ones that will better withstand the tests of economic turmoil and financial crisis.

Under the restructurings, called re-remics, dealers take the top-rated part of a bond and create a new, stronger bond, and another that accepts higher risk for greater return potential.

"It's a necessary fix," said Samuel Warren, a director at NewOak Capital in New York, and former trader at Deutsche Bank where he specialized in riskier mortgage debt created outside government-supported programs of Fannie Mae and Freddie Mac.

"Given that we've seen some of the biggest changes in decades on home prices and unemployment, we have to check our premise in how we created the initial bonds," he said.

Strengthening securitizations may help improve investor confidence in the structures, a key goal of the Obama administration, analysts said. Revisions to securitization rules and reducing reliance on ratings are key goals of major financial regulatory reform proposed this month.