July 16 (IFR) - Freddie Mac on Tuesday announced a new bond
that sells off some of the default risk of its residential
mortgage holdings to private investors willing to gamble on its
pool of loans.
The so-called "risk-sharing" residential mortgage-backed
securities (RMBS) are now being marketed to investors, with
US$400 million of the bonds to be closed next week.
The new bond program comes after the Federal Housing Finance
Agency (FHFA), a government regulator, directed Freddie Mac and
sister agency Fannie Mae to share out the risk on US$30 billion
each of their loan portfolios, as part of a wider initiative to
minimize their vast footprint in the US residential mortgage
The two companies, which finance nearly 90% of the country's
mortgages, were put into US government conservatorship in 2008
after heavy losses incurred in the subprime mortgage meltdown -
but the government now wants to scale back its involvement in
the mortgage business.
"The basic premise is that with an uncertain future and a
general desire for private capital to re-enter the market,
market presence should be reduced gradually over time,"
FHFA acting director Edward DeMarco said earlier this year.
The new Structured Agency Credit Risk (STACR) bonds sell
some of the risk of future losses on a US$22.83 billion pool of
residential mortgages to investors.
Those mortgages underlying the "stackers", as the bonds have
come to be known in the industry thanks to their acronym, were
all originated in the third quarter of 2012.
Freddie Mac, formally known as the Federal Home Loan
Mortgage Corporation, will hold the senior-most risk in the
deal, or US$22.15 billion of the reference pool, as well as a
first-loss piece of US$69 million.
Unlike almost all securitized investment products, the two
floating-rate notes - US$200m each, with average lives of 2.19
years and 8.21 years - will not be rated by credit agencies.
Credit Suisse is the sole bookrunner and structuring agent
on the deal, while Barclays is the joint lead underwriter.
Citigroup, Morgan Stanley and CastleOak are co-managers.
The underlying collateral pool excludes loans with mortgage
insurance, or with loan-to-value ratios less than 60% or more
Pre-marketing materials to investors make it clear to
potential investors that, even though Freddie Mac is currently
government-run, they could take losses on the transaction.
Some of the triggers potentially causing such losses include
loans that become 180 or more days delinquent, or the occurrence
of a short sale prior to the 180-day delinquency.
The deal has a so-called senior/subordinate structure, with
principal paid pro-rata between senior and subordinate classes,
meaning that all tranches receive their proportionate shares of
principal payments during the life of the securities.
Freddie Mac has ambitious plans for the STACR product and
hopes to issue multiple deals this year. It plans to become a
programmatic issuer of the structure by 2014.
It is also widely expected that Fannie Mae, which is an even
larger agency, will come out with a similar product shortly.
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(Reporting by Adam Tempkin; Editing by Marc Carnegie)