General Motors Acceptance Corp. has issued what is believed to the first Dutch residential-mortgage backed securities deal, in which the interest-rate risk is hedged. In this EUR400 million (USD430.74 million) securitization the special purpose vehicle has entered an interest-rate swap with Citigroup, in which it pays the fixed rate it gets from the portfolio of mortgages and receives three-month Euribor, the rate it needs to pay on the notes. In previous transactions the issuer has had to hold the risk of interest rates falling and homeowners refinancing their mortgages, which is also known as prepayment risk.
William Kloehn, managing director at Citigroup in London, said this is the first time that an issuer of Dutch RMBS has entered a swap to hedge prepayment risk from mortgages. In the past, Dutch issuers of RMBS originated mortgages and then securitized them in a pool paying a floating-interest rate. This exposed the issuer to prepayment risk. Unlike in the U.S. where investors are familiar with prepayment risk and will buy MBS pass-throughs, European investors demand floating-rate RMBS deals, Kloehn explained. This transaction may spur other Dutch RMBS issuers to look at using swaps to alleviate prepayment risk, said Kloehn.
