Freddie Mac Said to Prepare Mortgage Securities Sharing Risk
Freddie Mac (FMCC) is preparing to market mortgage securities that will share with investors the risk homeowners don’t repay their government-backed loans, according to a person with knowledge of the plans.
The government-controlled mortgage financier, which typically covers losses after defaults, hired Credit Suisse Group AG to manage its first deal and plans to meet with potential investors in cities including New York, Boston, Chicago and London starting next week, said the person, who asked not to be named because terms aren’t set.
The offering reflects an effort by the Federal Housing Finance Agency to reduce the role of Fannie Mae and Freddie Mac in the residential-mortgage market, where government-backed loans now account for more than 85 percent of lending. The FHFA, which has overseen the firms since they were seized in 2008, has been directing them to raise how much they charge to guarantee their traditional mortgage bonds and asked them to each attempt to share risk this year on $30 billion of home loans.
Insurers and bond buyers, including hedge funds and real-estate investment trusts, have been awaiting the transactions and expressed interest in profiting from the new program, in which firms other than Fannie Mae and Freddie Mac will bear some of the initial losses after mortgage defaults. The bonds may pay more than traditional mortgage securities.
“There hasn’t been a deal yet, but we’re expecting there to be at least a couple this year,” Invesco Mortgage Capital Inc. (IVR) Chief Investment Officer John M. Anzalone said during an investor conference on June 12.
Freddie Mac’s first deal could be part of a series of transactions known as Structured Agency Credit Risk issuance, the person said. It would provide protection to the McLean, Virginia-based company on a pool of recently originated mortgages and have characteristics similar to senior-subordinated structures in the so-called non-agency market, the person said.
Thomas Fitzgerald, a spokesman for Freddie Mac, said it would be premature to comment on any potential deals. Andrew Wilson, a spokesman for Washington-based Fannie Mae, said the company is discussing plans with the FHFA. He declined to comment further.
The risk-sharing transactions would be similar to the new system of mortgage finance in the U.S. envisioned under legislation to be introduced today by Senators Bob Corker of Tennessee and Mark Warner of Virginia. The bill would wind down Fannie Mae and Freddie Mac, replacing them with a new federal entity that would insure mortgage debt and require private firms to take the first 10 percent of losses.
In 1998, Freddie Mac issued securities backed by derivatives known as Mortgage Default Recourse Notes, or Moderns, which transferred the initial losses on $20 billion of loans to private investors. The deal type was abandoned as a global crisis that year sparked by Russia’s debt default roiled markets. The market for private, non-agency bonds thrived during the 2000s, until collapsing in 2008.
To meet the goals this year for executives set by the FHFA, Fannie Mae and Freddie Mac must conduct “multiple types” of risk-sharing transactions, Edward J. DeMarco, the regulator’s acting director, said in a speech last month. That would include deals with private mortgage insurers, derivative-linked bonds and securities with varying levels of risk backed by the same loan pool known as senior-subordinated structures, he said.
“The goal for 2013 is to move forward with these transactions and to evaluate the pricing and the potential for further execution in scale,” DeMarco said. “What we learn in 2013 will set the stage for the targets for 2014, and I fully expect to move from a dollar target to a percentage-of-business target at some point in the future.”
The transactions may also be viewed as “pilot tests” to one type of approach to reforming mortgage finance over the longer term, he said.
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