UPDATE 1 - Freddie offers bigger CRT subordinate stack
Freddie Mac rolled out a new structure for its credit risk transfer securitization on Tuesday, offering a larger portion of the subordinate stack to private investors.
The US$1.353bn Structured Agency Credit Risk 2022-DNA1 featured two M1 tranches for the first time. In prior STACR deals, the US mortgage finance agency had offered a single M1 note.
By selling off a bigger portion of the riskier part of the capital stack Freddie will hold less capital against possible losses on the senior AH part of the structure, freeing up capital for Freddie to finance more mortgages.
“The capital that is retained against this tranche drives a lot of the economics of the deal. The higher the credit support for this (AH) tranche, the lower the required capital and the better the economics,” JP Morgan analysts wrote in a research note.
After a capital rule change from its regulator the Federal Housing Finance Agency last year, Freddie raised the share of the subordinate part of its STACR deals to 4.25% from 2.25%. Freddie and its larger sibling Fannie Mae use credit risk transfer securities to offload some of the credit risk on mortgages they guarantee to private investors. More favorable capital treatment of CRT by FHFA under the Biden administration, together with a resilient US housing market, are expected to result in record CRT issuance in 2022.
Earlier this month, Freddie said it plans to print at least US$25bn in residential CRT this year, up from US$18bn in 2021. Fannie said it would issue US$15bn in CRT in 2022. Fannie priced a US$1.506bn Connecticut Avenue Securities Trust 2022-R01 on January 11.
In Freddie’s new CRT structure, the M-1A note priced at 100bp over 30-day compounded average SOFR, which was at the tight end of its guided range of 100bp to 110bp. It carries a weighted-average life of 1.95 years and credit support of 3%. S&P and Kroll are expected to rate it A- and A, respectively. The M-1B tranche with a WAL of 4.66 years and credit enhancement of 2% priced at 30-day compounded average SOFR plus 185bp, which was inside its guidance of 190bp to 200bp. S&P and Kroll planned to assign it with BBB and BBB+ ratings, respectively. Nomura and Morgan Stanley are the joint bookrunners.