Freddie Mac Pays More to Sell Risk-Sharing SecuritiesJody Shenn
Bond investors demanded to be paid more to potentially bear losses on mortgages guaranteed by Freddie Mac, amid a slump in risk-sharing notes sold earlier by the firm and competitor Fannie Mae.
Freddie Mac is paying as much as 0.85 percentage point more relative to benchmark rates compared with its last deal as the taxpayer-backed mortgage giant sold $1.1 billion of the securities today at yields that are mostly wider than an earlier offer, according to a company statement. The junior portion of the April transaction tumbled to 97.5 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 amid growing supply and investor growing wariness of riskier debt may show the challenges of getting sufficient investor support for a market seen as a potential model for the future of the $9.4 trillion U.S. home-finance system.
“We issued at a time of more market uncertainty than we’ve seen in recent months and are now at overall levels closer to what we saw at the beginning of the year,” Kevin Palmer, a vice president at Freddie Mac, said in the statement.
The drop is good because yields had narrowed too much to be sustainable, said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute in Washington.
“Healthy corrections are always a good thing,” Goodman, a former Wall Street mortgage-bond analyst, said today in a telephone interview. “They just got way too tight.”
Bipartisan legislation introduced in a Senate committee this year and endorsed by the Obama administration suggests replacing Fannie Mae and Freddie Mac with a government reinsurer that would bear losses only after private capital covers the first 10 percent. The set-up would tie loan rates more directly to payments investors or insurers demand to bear that risk.
McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae have issued $9.3 billion of the risk-sharing securities, along with seeking similar insurance policies.
The firms’ mortgage guarantee fees implied by the yields demanded on risk-sharing bonds sold by Fannie Mae in May were about 0.13 percentage point, “well below” current levels, Morgan Stanley analysts including Vipul Jain wrote in a report that month. The company charged about 0.57 percentage point in 2013, according to a regulatory filing.
In its latest deal, Freddie Mac will pay a floating rate of 2.5 percentage points more than a benchmark on some of the middle-ranked notes, according to the statement. That compares with a spread of between 2.15 percentage points and 2.35 percentage points above the one-month London interbank offered rate in marketing this week and of 1.65 percentage points on a similar portion of its April deal.
A junior slice was sold at a spread of 4.10 percentage points, compared with a range of 3.5 percentage points to 3.75 percentage points offered earlier and 3.6 percentage points in the last deal.
Part of today’s offering is tied to mortgages with loan-to-value ratios higher than 80 percent, a first for the company. Fannie Mae began offering risk-sharing bonds tied to such loans, which carry separate mortgage insurance, earlier this year.