Fannie Mae is expanding its effort to share mortgage losses with private investors, an initiative encouraged by the taxpayer-backed company’s new overseer this week in his first public comments.
The housing-finance giant is seeking this month to sell $1.6 billion of debt tied to the risk of homeowner defaults, a person with knowledge of the transaction said. The deal would be the first of its type that’s partly linked to borrowers with limited equity in their properties. The offering will also be the largest after Fannie Mae and competitor Freddie Mac sold $4.5 billion of similar securities since July.
Federal Housing Finance Agency Director Melvin L. Watt announced yesterday a tripling of the goals for such risk-sharing by the firms, which began under his predecessor and offer potential profits to investors such as Invesco Mortgage Capital Inc. and insurers such as Arch Capital Group Ltd. The regulator embraced the effort even as he moved to reverse attempts to shrink the companies’ role in a real-estate market in which they back about 60 percent of new U.S. mortgages.
“These transactions have opened up private capital to share in credit losses, which protects taxpayers from bearing all of the potential losses,” Watt said in a speech in Washington.
Fannie Mae’s latest offering may include four sets of bonds, tied to the performance of two pools of mortgages, said the person, who asked not to be named because the information wasn’t public. Similar to previous deals, borrowers in a $58 billion group have loan-to-value ratios between 60 percent and 80 percent. Loans in a $14 billion pool have ratios as high as 97 percent and carry mortgage insurance.
Fitch Ratings may offer credit grades of BBB+ to higher-ranking bonds tied to the latter pool, while Standard & Poor’s may grant them a speculative-grade of BB, the person said. The safer bonds tied to other loans may receive BBB- rankings from both. A riskier set of securities won’t be rated.
The FHFA is asking Fannie Mae and Freddie Mac to share risk on $90 billion of loans each this year through bond sales and other transactions, up from a $30 billion target last year. Freddie Mac is already about two thirds of the way to matching the goal, while Fannie Mae has completed about one third of the targeted loss-sharing, according to Bank of America Corp. analysts led by Chris Flanagan and Satish Mansukhani.
“Transferring credit risk is an important goal for Fannie Mae, and we’ll continue to bring these transactions to the market,” Callie Dosberg, a spokeswoman at Washington-based Fannie Mae, said today by telephone.
GlobalCapital reported the potential size of the sale earlier today on its website.