Kucinich Urges Treasury to Strengthen Re-remic Oversight


Washington, DC – October 1, 2009 – (RealEstateRama) — Congressman Dennis Kucinich (D-OH) today asked Treasury Secretary Timothy Geithner to address the potential threat to the financial system posed by resecuritization of existing residential mortgage backed securities, informally referred to as ‘re-remic.’  Congressman Kucinich recently brought the matter to the attention of the Securities and Exchange Commission and uncovered that only $50 million of a $664 billion market is overseen by the SEC.

The Re-remic process takes previously issued residential mortgage backed securities and collateralized debt obligations whose value has deteriorated considerably, and repackages them into larger, more complex financial instruments in an attempt to create investment-grade products once again. Investors and analysts alike have stated concerns that re-remics could be used to hide toxic assets and manipulate capital requirements. In the letter, Kucinich called on Secretary Geithner to create a stronger regulatory framework to ensure that financial institutions are not continuing practices that led the financial system to the brink of collapse in 2008. 

The full text of the letter follows: 

October 1, 2009

The Honorable Timothy Geithner


United States Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

Dear Secretary Geithner:

On August 26, I sent a letter to Securities and Exchange Commission (SEC) Chairman Mary Schapiro expressing my concerns about the increased popularity of the practice of resecuritization of real estate mortgage investment conduits, informally referred to as ‘re-remic.’ Chairman Schapiro’s response and subsequent conversations with her enlightened me to the reality of the situation: of the total $664 billion resecuritization market (approximate), only $50 million in transactions have been seen by the SEC. The vast majority of re-remic transactions are exempted and, consequently, outside the purview of the SEC.

On September 30, the Committee on Oversight and Government Reform held a hearing entitled, Credit Rating Agencies and the Next Financial Crisis. During the hearing, I brought up the subject of re-remic and the potential threat these new and more complex investment vehicles pose for the financial system. Because the majority of the transactions fall outside the SEC’s jurisdiction, credit rating agencies bear the responsibility of investigating the safety and integrity of these complex products.

At the hearing, Ilya Eric Kolchinsky, former Managing Director at Moody’s, remarked, “I recently saw a (re-remic) proposed that had, to my view, no discernable economic value. Substantial costs would be incurred, but to my knowledge, there would be no value you added. To me, that is a sign that somebody is playing a game with some regulation somewhere.” Additionally, credit rating agencies are already downgrading re-remic that was rated investment grade less than six months ago.

I would also call to your attention an article appearing in today’s Wall Street Journal that raises the same concerns I have.[1] Referring to the practice as “financial alchemy,” the article warns that the practice of re-remic may be used to game capital requirements and that credit rating agencies–the majority of which operate under an ‘issuer pays’ model–are complicit in the scheme because of the substantial fees that they can collect.

Considering the SEC’s limited jurisdiction in this area, I believe the U.S. Treasury has a responsibility and obligation to intervene and to address the potential threat that re-remic poses to the financial system. Indeed, your mission charges you with “ensuring the safety, soundness, and security of the U.S. and international financial systems.”

The Treasury already has the regulatory authority to address this situation. I request that Treasury reconsider the regulatory framework governing the resecuritization of real estate mortgage investment conduits. Promulgating new, stronger, and more stringent regulations will protect the financial system and ensure that financial institutions do not employ re-remic as a way to game capital requirements or conceal toxic, non-performing assets.

I also request your assurances that Treasury will take all steps necessary to eliminate any exposure of the American taxpayer to re-remic that may be present in any initiative undertaken to support the financial system and provide liquidity to financial markets. Finally, I urge you to resist any efforts to expand the definition of eligible assets in any program to include re-remic products.

Thank you for your prompt attention to this matter.



Dennis J. Kucinich

Member of Congress

[1] Scism, L. and Smith, R. “Wall Street Wizardry Reworks Mortgages.” Wall Street Journal. October 1, 2009: C1.


Contact: Nathan White (202)225-5871


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