Freedom Mortgage, one of the biggest mortgage lenders in the US, faced a tough reception in the high-yield market as investors were put off by a recent regulatory clampdown on the company and the weak performance of its bonds.
Freedom cut the size of its senior bond offering to US$250m from US$350m and hiked the yield to 11.25% from whispers of high 10% area on Friday. The pricing of the deal, a five-year non-call two issue, was also delayed by a day.
Three investors that spoke to IFR listed a number of concerns about the Freedom Mortgage deal: a clampdown by regulators over its lending practices, its high cost of capital and the weak performance of its existing bonds, among others.
Its outstanding US$700m bond - a 8.25% 2025 issue that matures in April 2025 and priced just under a year ago at par - was trading at just 88.875 in secondary with a yield of 10.80%, according to Refinitiv data.
In the end, the new deal - which had a shorter maturity of 2024 - came at a higher yield than the 2025s.
“They have definitely been put in the penalty box,” said one high-yield investor. “We have owned them before, but they have had some missteps.”
Freedom Mortgage did not respond to requests by comment by IFR. Lead-left JP Morgan declined to comment.
TOUGH STORY
Founded in 1990 and headquartered in Mount Laurel, New Jersey, the company is one of the nation’s largest full-service non-bank mortgage companies and has grown rapidly.
It was the twelfth biggest US mortgage lender in 2018, up from 78 in 2012, according to Inside Mortgage Finance.
It was also the ninth largest lender of loans insured by the Federal Housing Administration (FHA) and the sixth largest lender of VA loans to veterans in 2018.
But it got a slap on the wrist by government-owned agency Ginnie Mae last summer, which placed a restriction on company and limited its ability to securitize certain loans to veterans.
That restriction, which was also placed on two other lenders, has since been lifted.
Still, the action stemmed from concerns that Freedom Mortgage was repeatedly refinancing loans to veterans - a practice known in the industry as churning - which can result in unnecessary fees and higher interest rates for borrowers.
“The company disputed that they did anything wrong, but there is always a possibility that something like that could happen again,” said another high-yield investor.
The investor was also leery about how rising delinquencies might impact Freedom Mortgage’s business. It originates loans, but also buys mortgage servicing rights. Indeed, some of the proceeds from the new bond issue were for potential MSR purchases.
Ginnie Mae guarantees that investors who buy mortgage securitizations will be repaid, but as a servicer, Freedom has to pay investors each month in the event of a delinquency. The company is reimbursed by Ginnie, but there is often a time lag.
“It would have to be a draconian scenario for them not to be able to pay the securities, but it is still a risk,” said the investor.