Originators profit from discounted RMBS

Philip Bayley
Further to our commentary last week on the use of switches in the residential mortgage-backed securities market to encourage investors to take up new RMBS issues, Fitch Ratings observed last week that increasing numbers of European banks and other originators are offering to buyback their securitised issues, the latest being a €16.5 billion offer from Banco Santander. This is the largest such offer to date and covers seven RMBS issues, two asset-backed securities issues and five collateralised debt obligations.

In this case the originators are not making buyback offers to help investors clean-up their investment portfolios and encourage demand for new product, although the offers may ultimately have that affect. Originators are offering to buyback their securitised issues for purely mercenary reasons.

The offers are being made at a discount to face value and the originators expect to make a profit on the deal. The originators are well aware of the credit quality of the underlying collateral and its expected performance over its remaining life. They are simply taking advantage of distressed secondary market prices.