Chimera Caution

This may become a false alarm if S&P reviews their re-REMIC collateral monitoring methodology and finds out the mortgages are just fine.  If they don’t, and there are widespread downgrades because of potential cash shortfalls, it will be especially bad for investors who hold the high-risk unrated or lower rated bonds.  That would be Chimera.

As most of you know, Chimera was the leader in issuing reREMIC deals last year. They (or their Wall Street dealers) sell off the front end cash flows as highly rated bonds, and keep the lower-rated and unrated back end cash flows.

S&P announced yesterday that they may have goofed on their ratings for as many as 1,196 of the rated bonds from 129 residential mortgage deals.

I guess it goes without saying that owning the subordinated bond when the senior bond is downgraded can be a bad thing. If there is enough of a shortfall to keep the senior bonds from getting all their stated principal and interest, the junior bonds will get zip.

Here’s the bloomberg article.

Here’s the S&P report with a list of specific bonds put on ratings watch for downgrade.

Most are listed as issued by Wall Street dealers (so what else is new?), so you wouldn’t know whether CIM bought the B pieces from those deals without a list of holdings from CIM. One big issuer name was “Asset Repackaging Vehicle Ltd” which I thought might be CIM or IVR, but it turned out to be HSBC… I think we can safely say that virtually all of these deals have dealer names on them, but the junior bonds were sold to CIM, IVR, or a handful of vulture funds and hedge funds.


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