Fannie Mae, the government-controlled mortgage-finance company, sold its first notes tied to the risk of homeowner defaults at lower relative yields than offered earlier, a person with knowledge of the deal said.
A $337.5 million, BBB- rated slice of the debt will pay a floating yield of 2 percentage points more than the one-month London interbank offered rate, after being marketed at a spread of 2.25 percentage points last week, said the person, who asked not to be named because the terms aren’t public. A riskier $337.5 million unrated portion sold at a spread of 5.25 percentage points, down from 5.75 percentage points.
The debt is attractive to investors because the underlying mortgages carry strong characteristics, including never having been delinquent since being made last year near “the peak of tight underwriting” after housing crashed, said Jason Callan, Columbia Management Investment Advisers LLC’s structured-products head. Home prices have also jumped about 12 percent since the loans were originated, lowering their risks, he said.
“This is probably as strong of a credit profile as one is going to get,” said Callan, whose Minneapolis-based firm manages about $340 billion. “Everything about it from a fundamental perspective is really attractive.”
Andrew Wilson, a spokesman for Washington-based Fannie Mae, declined to immediately comment on its offering. Bank of America Corp., which helped structure the securities, and Credit Suisse Group AG managed the sale.
U.S. regulators see sales of the notes by Fannie Mae and competitor Freddie Mac as a way to reduce the dominance of the two government-backed companies and assess whether they are charging enough to guarantee their traditional mortgage bonds.
The risk-sharing deals also resemble provisions in legislation introduced this year that would overhaul the $9.3 trillion U.S. mortgage-finance system. The bill, by Republican Senator Bob Corker of Tennessee and Democratic Senator Mark Warner of Virginia, was praised by President Barack Obama.
Freddie Mac sold $500 million of similar debt at spreads of 3.4 percentage points and 7.15 percentage points in July, completing its first deal as concern the Federal Reserve would slow its $85 billion in monthly debt buying roiled markets.
Fannie Mae’s securities, which are tied to about $28 billion of mortgages, differed from Freddie Mac’s notes by carrying ratings, requiring more loans to sour before investors suffer losses and removing tests that can delay principal repayments, according to a Deutsche Bank AG report last week.
Libor, the rate at which banks say they can borrow from each other, was fixed at 0.24 percent today.