By Adam Tempkin
Government-supported mortgage giant Fannie Mae will
be officially kicking off the investor roadshow for its debut “risk-sharing”
mortgage-backed security (MBS) over the next two weeks, according to three
investors that have been briefed on the upcoming deal and one investment
banker.
The transaction will closely mirror a similar
inaugural US$500m deal from sister agency Freddie Mac that priced in July,
known as the Structured Agency Credit Risk (STACR) bond. The purpose of this
new class of so-called “risk-sharing” MBS from the GSEs is to sell off some of
the default risk of their residential mortgage holdings to private investors
willing to gamble on their pool of loans.
The new bond programs come after the Federal Housing
Finance Agency (FHFA), a government regulator, directed both GSEs to share out the risk on US$30 billion 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.
Bank of America will be lead underwriter on the
Fannie Mae deal, but Credit Suisse, which led Freddie Mac’s STACR offering,
will be heavily involved in the transaction as well.
Investors say that the FHFA strongly encouraged
Freddie Mac to share its structuring technology with Fannie Mae in an attempt
to make the new class of products as homogeneous and easily understandable to
investors as possible.
Therefore, the Fannie Mae version will be structured
similarly to STACR – as an unsecured general obligation of the GSE – rather
than in a “trust” or “special purpose vehicle (SPV)” structure via a
credit-linked note (CLN), which may disappoint some bond investors who held out
hope that Fannie would use a different format than Freddie.
“A ‘trust’
structure gives more certainty of protection to the investor because it better
segregates the cashflows away from the GSEs, in case they were eventually to
get wound down,” said one senior portfolio manager specializing in securitized
products who was hoping the Fannie deal would be a trust. “An SPV, or trust,
means you get repaid for the risk you’re taking from outside the Fannie Mae
estate, which protects you in case the GSEs go away at some point.”
The risk-sharing deals are considered “synthetic” or
credit derivative-like structures because they reference a pool of recently
originated GSE-guaranteed mortgages. For instance, the STACR bonds sold some of
the risk of future losses on a nearly US$23bn pool of Freddie-Mac guaranteed
residential mortgages to private bond investors.
Freddie Mac originally intended to use a trust
structure when it was planning its deal last year, but encountered onerous
registration requirements and costs under new Dodd-Frank rules governing swaps
mandated by the Commodity Futures Trading Commission.
The rules would have defined a proposed CLN
structure as a “commodity pool” under CFTC guidelines, meaning an increased
regulatory burden. The GSE opted for an unsecured general obligation structure
instead.
Investors assumed that Fannie Mae might have more
lead time to get the appropriate licenses from the CFTC to register as a
derivatives user. According to investors, the GSE strongly considered using the
SPV structure when the deal was in its planning stages this past spring, as the
structure would have broadened the
appeal of the product, and hence the base of buyers.
However, bankers say that the structure just wasn’t feasible for the first round of STACR deals issued by the GSEs this year.
Freddie Mac intends to issue its second deal towards the end of the year, and both GSEs have ambitious plans for the STACR product and hope to become programmatic issuers of the new product by next year.
“In a way, it’s good that that the Fannie and Freddie deals are so similar in structure, because if they’re almost fungible, they will be more successful as a consistent, recurring product,” said another MBS investor.
The FHFA aims to transform the STACR bonds into a consistent, broadly distributed, liquid credit product.
The Freddie Mac deal was popular with investors, as it presented a rare opportunity for bond investors to tap into US residential-mortgage credit as the housing recovery is on an upswing, while also offering a better yield than similar risk products.
Investors have had very few avenues of access to US mortgage credit post-crisis, as the new-issue private-label MBS market all but disappeared, and is only now starting to make a comeback.
The Freddie Mac STACR deal was upsized at pricing to US$500m from US$400m due to increased investor demand. The transaction also has performed well in secondary-market trading since it was originally issued in July.
Spreads on the US$250m M-1 class, which priced at
one-month Libor plus 340bp back in July, have now tightened in to Libor plus
291bp in secondary trading as of this past Tuesday, indicating a strong demand
on the part of investors to own the bonds.
The FHFA referred calls to Fannie Mae.
“We are working with the FHFA to meet the goals of
the 2013 Conservatorship Scorecard,” said Fannie Mae spokeswoman Callie
Dosberg.
Bank of America and Credit Suisse declined comment.
