Monday, 22 October 2018

Freddie Mac tunes HARP for new bond deal

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Freddie Mac is marketing its first securitisation of mortgages from the HARP relief programme that helped underwater borrowers stay in their homes after the housing crisis.

While it is Freddie’s first deal underpinned by HARP loans, it is merely the latest in an expanding issuance schedule that transfers risk from the government to bond investors.

The agency has issued some US$22bn of credit risk transfer bonds since 2013, but this is the first time Home Affordable Refinance Program loans have been used as collateral.

“The HARP deal is another step in the next generation of residential mortgage credit,” said Neil Aggarwal, portfolio manager and head of RMBS at Semper Capital.

He said CRT bond issuance was “evolving in structure and collateral, offering additional entry points for investors”.

Although the collateral in the US$200m deal is more seasoned than in previous such deals - around 7.5 years versus six to seven months in some cases - the bond should price at a premium.

Guidance showed a spread of 265bp-275bp over one-month Libor on the M-2 Class, rated B by Fitch and BB- by Morningstar.

That compares to a spread of one-month Libor plus 235bp on the comparable M2 tranche on Freddie’s latest HQA3 deal in October, according to IFR data.

One investor said that the wider spread likely reflected the relatively small size of the trade and the fact that it is the first of its kind.

But final pricing is likely to grind tighter on what was heard to be strong buyside interest, the investor said.

The loans in the new deal, just over US$15bn in total, helped people with little equity in their home refinance at more attractive rates.

Since they were made, homeowners have seen the equity value rise as house prices have increased. The current mark-to-market combined loan to value ratio has dropped to 82% from 98%.

But the longer seasoning could indicate increased pre-payment risk. According to Fitch, roughly 95% of the underlying loans have been current for the prior 36 months.

“The deal structure largely emulates the traditional STACR program,” Aggarwal said, referring to the Structured Agency Credit Risk programme under which Freddie’s CRT bonds are issued.

“But on previous issues we’ve been used to looking at conventional 30-year mortgages that have been originated in recent months,” he said.

Those who believe the loans will pre-pay relatively quickly may opt to buy the discount bond also on offer, the investor said. The M2 tranche is expected to be split between a bond that prices at par and another a few points below that.

“If the pre-pay speed is faster, you will be getting your money back quicker, so the discount bond may be more attractive to you,” said the investor.

Credit Suisse structured the deal and is a bookrunner with Bank of America Merrill Lynch.


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