The so-called “risk-sharing” residential mortgage-backed securities (RMBS) are now being marketed to investors, with US$400m 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$30bn each of their loan portfolios, as part of a wider initiative to minimize their vast footprint in the US residential mortgage industry.
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, [their] 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$22.83bn 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$22.15bn of the reference pool, as well as a first-loss piece of US$69m.
Unlike almost all securitised 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 than 80%.
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.
