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By AL YOON
Fannie Mae is planning a bond deal that will pay buyers to share a tiny sliver of the risk of the U.S. home-lending business.
The Washington-based company plans to sell about $675 million of securities in an offering that is expected to be announced next month. The securities are derivatives whose value will depend on the performance of a pool of $28.05 billion of mortgages acquired by Fannie Mae in the third quarter of 2012, according to a term sheet reviewed by The Wall Street Journal.
The deal follows a similar issue in July from Fannie's smaller brother, Freddie Mac. Both companies are issuing the securities to help meet a mandate from their regulator, the Federal Housing Finance Agency, to reduce the cost of defaults to U.S. taxpayers, who bailed out the companies with $188 billion during the financial crisis.
The plan represents the latest effort to lure Wall Street back into a business that generated billions of dollars in fees and profits during the housing boom but has since gone nearly silent.
Fannie and Freddie don't make mortgage loans, but buy loans made by other lenders and package them into securities that they sell to investors, with a guarantee that buyers will continue to receive regular principal and interest payments even if underlying mortgages default.
This guarantee is a key selling point for mortgage investors, particularly after so-called private-label securities suffered outsize losses during the financial crisis. Both companies have been raising the fees they charge for the guarantee since the crisis, to better protect themselves against default risk and to reflect higher prices charged by other mortgage companies.
The push by the FHFA coincides with pressure from Congress and the Obama administration to wind down Fannie Mae and Freddie Mac. Echoing the idea of risk-sharing securities, one bill sponsored by Sens. Bob Corker (R., Tenn.), and Mark Warner (D., Va.), would require that private investors take the first losses on mortgages while leaving some government backing in place.
The planned sale comes as private investors have begun to tiptoe back into nongovernment-backed mortgage debt following the crisis. Investors have been more willing to accept riskier debt in the past year as the housing market has rebounded. Furthermore, underwriting terms are tight compared with those during the housing boom, reducing the risk of default.
"You'd expect it to generate significant demand because it's being offered at a good point in the mortgage credit cycle," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union. He didn't buy the Freddie Mac deal but will consider buying the Fannie Mae issue.
But some investors have been uncomfortable with judging risks of loans purchased by Fannie Mae because they didn't have detailed loan data until recently. Fannie Mae this month sought to ease those concerns, pledging in a presentation that its future deals, known as Connecticut Avenue Securities series, will include its "strongest performing book of business."
Private issuance of mortgage securities this year has hit $12 billion, its highest level since the crisis. More than $1 trillion annually was sold at the peak of the real-estate boom in 2005 and 2006. Since the crisis, Fannie, Freddie and government agencies have financed roughly nine in 10 U.S. home loans.
Buyers of Freddie Mac's first issue included PennyMac Mortgage Investment Trust, a mortgage-finance firm run by former Countrywide Financial President Stanford Kurland.
Fannie Mae has sought a credit rating on part of the deal in what is likely an attempt to broaden the field of investors. The senior of the two offered tranches is expected to draw the lowest investment-grade rating—BBB-minus—from Fitch Ratings, according to the term sheet.
Freddie Mac's deal wasn't rated, but executives in July said investors suggested that if they were to expand their participation in future deals, debt ratings would be important. After raising some yields, Freddie priced the two tranches at 3.4 percentage points and 7.15 percentage points above the one-month London interbank offered rate.
The Freddie Mac issue gained immediately after pricing and trades around 2.9 percentage points and 6.5 percentage points, respectively, above Libor, according to an investor who bought the bonds.
