June 28 (IFR) - In the clearest sign yet that the US
government is serious about its efforts to bring private capital
back into the mortgage market, government-sponsored enterprise
Freddie Mac has resurrected a concept that it abandoned 15 years
ago: risk-sharing bonds.
The mortgage finance giant has begun marketing a new
product, dubbed Freddie Mac Structured Agency Credit Risk
(STACR) securities, designed to offload the first-loss piece of
certain government-guaranteed MBS into the private capital
The GSE attempted a similar product in 1998 that was largely
deemed a failure. However, some in the MBS market say that the
novel and complex STACR structure, which is still being
fine-tuned before being pitched to investors for the next two
weeks by underwriter and structurer Credit Suisse, has the
potential to be a liquid and broadly sponsored new asset class
if a handful of pilot deals are successful this year.
"The growing buyer base in legacy non-agency RMBS
demonstrates the significant appetite for residential-mortgage
credit risk, which investors have had very few avenues of access
to for the last five years," said Bryan Whalen, co-head of MBS
investing at Los Angeles-based asset manager TCW.
"This new product from Freddie Mac gives this investor base
access to not just a new type of non-agency RMBS credit, but to
residential credit, period. If the GSEs are dedicated to this
program and become consistent issuers, it can grow into a
relatively liquid credit opportunity."
One senior banker away from the lead but with direct
knowledge of the product said: "This could create a benchmark
for credit in the mortgage market. Freddie Mac wants this to
become a broadly distributed liquidity product, and is expecting
that dealers and investors will give it a lot of attention."
The structure, which could prove complicated to model, will
include provisions that will protect investors from the risk
that borrowers either pre-pay their mortgages early (pre-payment
risk) or that shifting interest rates affect bond prices
A senior/subordinate "shifting interest" structure means
that a portion of principal pre-payments due to the most
subordinate bonds will be shifted to pay down the senior-most
bonds first - creating a buffer protecting the highest-ranked
slices. However, allocations to the senior-most bonds will
decline over time.
The structure will also have tranching, or slicing up, of
mezzanine bonds, and the first deal will be floating-rate, which
reduces convexity risk.
Market sources with knowledge of the deal said that it comes
in a "synthetic format", in that it references a pool of
recently originated mortgages and includes a mechanism so that
the duration of the bonds doesn't need to match the duration of
The banker said that it would be a "higher-yielding asset
with a significant credit component" that would be marketed not
only to traditional mortgage credit buyers, but also to
high-yield and so-called crossover traders.
Credit Suisse declined to comment, and Freddie Mac did not
return phone calls.
Freddie Mac has ambitious plans for the product and hopes to
issue multiple deals this year, according to a pre-marketing
announcement. It plans to become a programmatic issuer of the
structure by 2014.
It is also widely expected that Fannie Mae, the larger
mortgage GSE, will come out with a similar and coordinated
product very shortly.
The Federal Housing Finance Agency (FHFA), which regulates
the GSEs, hopes eventually to achieve consistency and regularity
of issuance of STACRs from both entities, with a market evolved
enough to offer predictability in terms of pricing levels and
The risk-sharing bonds are part of an ongoing effort by the
FHFA, and the US government, to gradually wind down and phase
out the GSEs' overwhelming footprint in the market. The two
companies currently finance nearly 90% of the country's
The taxpayer-backed organizations, which were put into
government conservatorship in 2008 after being wracked with
losses due to the implosion of the non-agency RMBS market, have
each been instructed by the FHFA to conduct US$30bn in various
risk-sharing programs this year.
The FHFA's other recent method to push mortgage finance back
to the private market has been to steadily increase the GSE's
guarantee fees - or G-fees - the amount that they charge lenders
and investors to guarantee loans.
However, lenders have pushed back on the spike in G-fees,
and the risk-sharing transactions are viewed as one way to
normalize them to market rates.
LISTENING TO THE MARKET
Credit Suisse worked on the structure with Freddie Mac for
18 months, sources said. However, even though an inaugural deal
has been named - titled STACR 2013-DN1 - investors say the
two-week roadshow is expected to be as much a due diligence
endeavor as an opportunity to educate investors.
"Freddie Mac is still exploring all opportunities and trying
to find out what attracts the most investors and most dollars,"
said a securitization insider.
"They're exploring investors' needs and requests from a
capital and cost standpoint. They will be good listeners during
What's more, while the first deal will consist of unrated
notes, Freddie Mac is still exploring whether or not to obtain a
credit rating for future iterations of the product, which would
make it more palatable to a wider segment of investors.
One idea is to obtain a rating from the National Association
of Insurance Commissioners, which since 2009 has been providing
US insurance companies and regulators with credit assessments of
legacy RMBS and CMBS in order to estimate risk-based capital
The NAIC's alternative approach to ratings, which differs
from credit rating agency grades, has been viewed by many in the
market as a more precise assessment of the value of RMBS held by
STACR 2013-DN1 is expected to be split into two
sequential-pay, unrated note tranches, issued at par as uncapped
Libor-based floaters. It is designed to furnish credit
protection to the GSE on a reference pool of recently originated
Payments will be general obligations of Freddie Mac with
characteristics similar to securities in senior/subordinate
private-label RMBS structures.
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