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Freddie, Fannie to expand risk-share bond issuance
25 November 2014 | By Joy Wiltermuth
Freddie Mac and Fannie Mae are both exploring new types of US home loan credit-risk transfer deals in the year ahead, executives at the agencies said Monday in separate interviews.

The mortgage giants expect regular issuance out of their existing risk-sharing bond platforms, but their programs will also be tweaked in fresh ways to draw in more private capital.

Freddie Mac, which rolled out its first Structured Agency Credit Risk (STACR) bond in 2013, is now mulling the addition of an actual-loss bond which could be ready by the second quarter, said Mike Reynolds, vice president for Credit Risk Transfer.

“Based on market conditions, we expect to roll that out using some seasoned collateral that looks as far back as 2009,” he said.

“It would be a new series (with) deal sizes of anywhere from US$500m to US$1bn.”

As of now, Freddie and Fannie’s risk-transfer deals only come with estimated losses based on a pre-calculated schedule for a pool of loans, an analyst said.

But an actual-loss product would reflect precisely what is recouped (or lost) on an individual loan once it is sold or refinanced out of the pool.

As part of this, Freddie announced today it will be increasing investor transparency in the coming year by adding actual losses to its existing loan-level performance data sets.

The analyst said that kind of deep-dive data has never before been available to investors.

On top of that, Freddie is also looking to add a senior-subordinated bond to its STACR series, which could broaden its buyer base by appealing to REIT investors.

For its part, Fannie declined to note any specific plans to alter issuance for its Connecticut Avenue Securities (CAS) program.

Laurel Davis, Fannie’s vice president for credit risk transfer, said the agency continues to look at ways for lenders to take on credit risk.

Fannie in October issued an inaugural US$989.13m credit risk transfer bond with JP Morgan, called JP Morgan Madison Avenue Securities Trust 2014-1.

The idea is the same as the STACR and CAS transactions, but with JP Morgan administering the loan pool rather than one of the agencies, said Suzanne Mistretta, senior director in Fitch’s US RMBS group.

“The objective is to have private investors share the credit risk,” she said. “And (it is a) novel way of doing it, with less reliance on Fannie’s infrastructure.”

In the fourth-quarter, Redwood Trust is expecting to complete a US$1.1bn risk-transfer deal with Fannie, its first-ever transaction of this type, according to an investor call.

Redwood is selling the conforming loans to Fannie, but will take any first losses of up to 1%.

“In 2015, will be researching how we can sell a portion of our first-loss position (as well),” said Reynolds at Freddie.

“Those transactions represent skin in the game for the seller, which is very appealing,” he said.

A combined US$11.8bn in risk-sharing bonds has already been offloaded into the private market via the STACR and CAS programs.

The deals reference a slice of risk tied to US$425bn in agency-backed home loans. Both programs have already been tweaked once to include a second loan bucket with higher loan-to-value loans above the original 80% cap
http://www.ifrasia.com/freddie-fannie-to-expand-risk-share-bond-issuance/21175272.article