UPDATE 1-Bid for "bulletproof" mortgage bonds boosts deals

(Recasts lead, adds details, byline)

By Al Yoon

NEW YORK, April 15 (Reuters) - Bond dealers more than quadrupled restructurings of risky mortgage securities in March in an attempt to "bulletproof" the debt from downgrades and credit losses, according to Amherst Securities Group.

The issues, which take one or more existing mortgage bonds and reallocate cash flows to create higher-quality securities, are increasing as more downgrades loom for issues still bearing the "AAA" ratings required of many investors, Amherst said in a research note published late on Tuesday.

Securitization of existing mortgage bonds soared to more than $3 billion in March from $688 million in February and $393 million in January, Amherst data shows.

"The spike in volume reflects the fact that the underlying securities, all originally purchased with an "AAA" rating and thought to have little or no credit risk, have already been, or are likely to be, downgraded," Amherst analysts, led by Laurie Goodman in New York, said in the note.

"Thus, they are no longer eligible investments for many market participants," they added.

The new "AAA" bonds are constructed to give investors unprecedented protection from losses due to defaults on loans not backed by Fannie Mae and Freddie Mac, they said. Credit risk is pushed to other parts of the deal, but by creating a "super duper" bond, investors can feel more comfortable that at least part of the issue is clear of downgrade danger.

The practice has long been studied as partial relief for insurance companies and other money managers that are confined by policy to hold only "AAA" bonds, and who may be forced to sell holdings as they are downgraded. Forced selling leads to fire-sale prices and potential write-downs on securities that the investor intended to hold to maturity.

Difficulty in finding buyers for the riskier segments, and uncertainty of accounting treatments, had curbed restructurings through the start of 2008, analysts have said.

The newest "re-remics," or real estate mortgage investment conduits, are mostly backed by prime jumbo mortgage issues where the heaviest downgrades have yet to come, Amherst said.

The rise in issuance coincides with the government's proposed public-private investment plan that aims to rid banks of the toxic assets that are soaking up capital and hindering profit-making ventures, such as making new loans.

To be sure, the performance of loans backing non-guaranteed mortgage bonds is "stunningly awful," Amherst said. Others noted the housing market outlook remains bleak.

Home price declines that fuel defaults and foreclosures may fall another 20 percent before reaching bottom at a 45 percent cumulative peak-to-trough decline, in 2010 or 2011, according to JPMorgan Chase & Co. Foreclosures in March climbed 44 percent to record levels from February as moratoriums expired and unemployment rose, according to Foreclosures.com.

Restructuring mortgage bonds to critics is also reminiscent of collateralized debt obligations, or CDOs, which under the watch of rating companies, created a sea of "AAA" securities whose collateral turned out to be far weaker than expected.

But the best of the new bonds are created from a single portion of an existing security -- versus multiple bonds --where underlying mortgage collateral is transparent, said Amherst and Fitch Ratings, which rates re-remics. Cushions against loss and more conservative rating assessments should also prevent a repeat of the disasters that faced "AAA" mortgage bonds in the past, it said.

Fitch has seen an increase in interest of dealers asking it to rate re-remics, said Roelof Slump, a managing director at Fitch in New York. (Editing by Leslie Adler)