Fannie Mae Pays More in Latest Risk-Sharing Debt Sale

Bond investors demanded to be paid more to potentially bear some of the losses on mortgages guaranteed by Fannie Mae in the biggest sale of a type of risk-sharing debt it began offering last year.

The government-backed mortgage giant will pay a floating rate of 3 percentage points more than a borrowing benchmark on some of the unrated notes placed today in a $2.1 billion offering, the Washington-based company said in an e-mailed statement. That was the high end of a range for that $945 million of debt in earlier marketing by underwriters led by Morgan Stanley and Nomura Holdings Inc., a person with knowledge of the deal said. Fannie Mae sold $644.5 million of similar securities in a May deal at a spread of 2.6 percentage points.

The higher cost and a slump in existing securities may show investor demand becoming sated. Fannie Mae and rival Freddie Mac are transferring more of their risk to the private market through bond sales and insurance policies that represent a model for the future of the $9.4 trillion U.S. home-finance system envisioned under bipartisan legislation introduced this year.

Federal Housing Finance Agency Director Melvin L. Watt, who oversees the firms’ conservatorships, said in May he wanted such risk-sharing transactions in the interim to keep “taxpayers from bearing all of the potential losses” as the companies back about 60 percent of new home loans.

“As planned, we have been coming to market with new issuance on a regular, quarterly basis,” Laurel Davis, vice president for credit risk transfer at Fannie Mae, said in the statement. “We plan to come to market again next quarter, likely in November.”

Delinquent Mortgages

Unlike previous risk-sharing debt sold by the companies, about 1 percent of the mortgages to which the latest securities are tied have been delinquent by 30 days before borrowers became current again, according to a presale report by Fitch Ratings.

The loans referenced by the $1.8 billion of risk-sharing bonds sold by Fannie Mae and Freddie Mac in 2013 and $4.3 billion placed earlier this year have experienced minimal delinquencies, reflecting their “better credit attributes than historical averages,” Fitch said in a report this month. Only 0.17 percent were delinquent, the ratings company said.

Today’s sale also included $555 million securities paying a spread of 1.2 percentage point over the one-month London interbank offered rate, up from earlier guidance on July 15 of 1 percent point, according to the person, who asked not to be named because the terms weren’t public. Fannie Mae sold similar debt in May at a spread of 0.95 percentage point.

One-month Libor, the rate at which banks say they can borrow from each other, was set at 15.6 basis points today. A basis point 0.01 percentage point.

Another, riskier portion of the May deal, which priced at par and fetched as much as 101.8 cents on the dollar in May, traded yesterday at about 99 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

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