Understanding Nonagency Mortgage Security Credit

This article traces the evolution of credit enhancement techniques in the nonagency mortgage security market from its primitive private placement beginnings in the 1970s, through the explosive Resolution Trust Corporation growth period, up to the sophisticated present of the re-REMIC (repackaged Real Estate Mortgage Investment Conduit). We explain how these techniques work and the forces in the market and regulatory environment that brought them about. We then analyze how some techniques can have unintended impacts on the financial characteristics of securities they are designed to credit-enhance, how to monitor low-quality high-yield collateral, and the different approaches of major credit agencies. While different nonagency securities may bear the same credit ratings, the structuring techniques used to achieve those ratings can play a critical role in the securities' ultimate performance. In general, the lower the credit quality of the collateral, the more that structure will affect performance.