Freddie Mac Said to Offer Higher Pay on Risk-Sharing Bonds

Freddie Mac may boost how much it pays bond investors to share the risk of homeowner defaults as the government-controlled mortgage-finance company plans its biggest offering of such debt, according to a person with knowledge of the deal.

A $360 million portion of the transaction expected to be graded Baa1 by Moody’s Investors Service and BBB by Kroll Bond Rating Agency may yield about 2 percentage points more than a borrowing benchmark, said the person, who asked not be named because the information is private. That compares with a spread of 1.45 percentage points on $245 million of similar securities that were part of a $630 million deal in November.

Freddie Mac is seeking to sell $1 billion of the debt this week, almost matching the total it sold in two 2013 offerings. It’s boosting the amount in part because the transaction will include a portion with more protection against the underlying loans souring. Issuance of risk-sharing securities by the company and competitor Fannie Mae began last year and is accelerating as policy makers seek to reduce their role in the market and assess whether they’re charging enough to guarantee their traditional home-loan bonds.

Laying Groundwork

Legislation introduced last year would overhaul the $9.4 trillion U.S. mortgage-finance system by replacing the companies with a government-owned bond reinsurer, a model that similarly shares risk with private investors. The bill, by Senators Bob Corker, a Republican from Tennessee, and Democrat Mark Warner of Virginia, was praised by President Barack Obama. Leaders of the Senate Banking Committee are now working to craft a bill based on that proposal, with help from the White House.

That’s why the deals and similar insurance policies being bought by Fannie Mae and Freddie Mac are “laying the groundwork for what will be the future of housing finance,” Mark Zandi, chief economist at Moody’s Analytics Inc., said yesterday in a telephone interview. “Fannie and Freddie’s risk-sharing activities are really planting those flowers.”

The $240 million of safer securities being marketed by Freddie Mac may receive ratings of A1 from Moody’s and A from Kroll and pay 1 percentage point more than the one-month London interbank offered rate, the person said. A riskier $408 million unrated portion may pay 4.5 percentage points to 4.65 percentage points, the person said. That compares with 4.25 percentage points for $385 million of similar debt sold in November.

The addition of the higher-ranking class in the latest deal means that it will take longer for the transaction’s Baa1 and unrated portions to be repaid as homeowners move or refinance. The projected average life of the Baa1 bonds is 4.79 years, the person said, compared with 1.59 years in the earlier deal. The securities all carry floating rates.