Freddie Mac May Face Higher Cost as Risk-Share Debt FallsJody Shenn
Bond investors are demanding to be paid more to potentially bear losses on mortgages guaranteed by Freddie Mac as risk-sharing notes that were sold earlier by the firm and competitor Fannie Mae slump.
Underwriters are offering yields relative to benchmark rates as much 0.7 percentage point higher than in the government-backed mortgage giant’s last deal as it plans to sell $1.1 billion of the securities this week, according to a person with knowledge of the sale. The most junior portion of the April transaction tumbled to a low of 99.1 cents on the dollar today from 107.6 cents at the start of last month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The plunge may show the difficulty of finding enough investor demand without higher costs in a market seen as a model for the future of the $9.4 trillion U.S. home-finance system under bipartisan legislation introduced this year and endorsed by the Obama administration. Federal Housing Finance Agency Director Melvin L. Watt, who oversees the firms’ conservatorships, said in May he wants such transactions before broader reforms are chosen to keep “taxpayers from bearing all of the potential losses.”
The slump partly reflects increased stress across markets and growing supply, according to Barclays Plc analyst Harkaran Talwar. McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae have issued $8.2 billion of the risk-sharing securities since starting sales a year ago, along with seeking similar insurance policies.
“Macroeconomic concerns, weak housing data, and increased supply affected investors confidence, and thin trading volumes in these bonds exaggerated the widening,” Talwar wrote in the Aug. 1 report.
Freddie Mac may pay a floating rate between 2.15 percentage points and 2.35 percentage points more than a borrowing benchmark on two sets of middle-ranked notes being offered this week, according to the person, who asked not to be identified because they’re not authorized to speak publicly. That compares with a spread above the one-month London interbank offered rate of 1.65 percentage points on a similar portion of its April deal.
The senior-most classes may pay a spread between 1.35 percentage points to 1.50 percentage points, compared with 0.85 percentage point in Freddie Mac’s last deal. The junior slice is being marketed at a spread of 3.5 percentage points to 3.75 percentage points, compared with 3.6 percentage points.
Part of the offering is tied to mortgages with loan-to-value ratios higher than 80 percent, a first for the company, the person said. Fannie Mae began offering risk-sharing bonds tied to such loans, which carry separate mortgage insurance, earlier this year.
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