Translation - English Freddie Mac – New RMBS for Major Banks
The US Federal Home Loan Mortgage Corporation (Freddie Mac) has recently issued a new type of residential mortgage-backed security (RMBS) called a Reference REMIC. The first issue was $2.4bn (approximately ¥250bn) and was offered simultaneously worldwide, including Japan. In future they will be issuing the same kind of RMBS every three months.
Unlike conventional RMBS securities, these provide features that limit investors’ risk by improving the disclosure of information – by publishing in advance details of the mortgages on which they are secured – and by setting a shorter final maturity date of ten years.
Sales in Japan and Asia are being handled by Morgan Stanley. Freddie Mac will continue to issue the same type of RMBS at a rate of one every three months in future. They say that demand for the first issue has come from financial institutions, principally major banks.
As RMBS securities, which bundle up home loans, may be redeemed early, an “average loan life” corresponding to the duration of the security is decided at the time of issue according to the market consensus.
Therefore, although the maturity for each issue is fixed at ten years, the average loan life varies according to the trend in interest rates, and the interest rate scenarios expected by investors, at the time that the conditions of the issue are determined. In the conditions of the first issue, the average loan life was 3.75 years, which was the median expectation of the various securities companies.
Freddie Mac plans to issue a Reference REMIC of $1bn to $2.4bn (¥110bn to ¥250bn) every three months. Compared to previous RMBS, they say they have devised better disclosure and liquidity. Around twenty securities companies worldwide have syndicated the issue and have adopted an electronic trading system allowing investors to check the current price daily at their screens.
By law, the maturity of home loans is thirty years, but this RMBS issue has reduced it to ten years, with Freddie Mac taking on a specific risk.
(From Nikkei Bonds & Financial Weekly, 16 May 2005)
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