Fannie Mae’s risk sharing transaction may be similar to Freddie Mac’s deal but some key difference broaden the deal’s investor appeal an could tighten pricing by up to 50 basis points, said Deutsche Bank analysts in a report today.
Fannie Mae’s Connecticut Avenue Securities 2013-C01 senior mezzanine class (M1) has been rated ‘BBB-’ by Fitch Ratings. The rating broadens the potential investor base for the deal, which “should be constructive for pricing on the M1 class,” said Deutsche Bank analysts.
But it is not just the ratings that will contribute to tighter pricing on the Fannie Mae deal.
Fannie’s applied severities are 5% lower than those in Freddie Mac’s Structured Credit Risk Debt Notes Series 2013-DN1. Deutsche Bank analysts said that “cumulative net credit events that are less than or equal to 1% of the unpaid principal balance” would trigger a 10% severity application in the Fannie Mae deal compared to 15% in the Freddie Mac deal.
For credit events that are between 1% and 2%, Fannie Mae “employs a 20% severity versus 25%” in Freddie Mac’s transaction.
“The lower severities in the Fannie deal create higher effective attachment points for the M1 and M2 classes than in the Freddie structure given that it will take nominally more credit events for a bond in the Fannie deal to incur a write-down,” explained analysts.
Another key difference is that the Fannie Mae deal removes the “cumulative net credit event trigger.”
In both the Fannie Mae deal and Freddie Mac’s Structured Credit Risk Debt Notes Series 2013-DN1 there is trigger language that dictates the allocation of unscheduled principal to the classes of the deal. Both deals require that total credit enhancement must be greater than or equal to 3% for unscheduled principal to be allocated to the M1 or M2 classes.
However, the Freddie Mac deal contains additional trigger language that the Fannie deal does not.
“The value associated with removal of the cumulative net credit event trigger will likely be driven by how investors apply defaults to the structure,” explained Deutsche Bank analysts. “To the extent that credit events are front loaded, the trigger would trip in the STACR transaction, shutting off unscheduled principal to the M1 class and leaving a larger percentage of that tranche outstanding, potentially making it more susceptible to losses.”
The removal of that trigger, as seen on the Fannie Mae deal, is anticipated to have significant value, if losses are front loaded.
“Removal of this trigger should allow the Fannie Mae's M1s to be easier to analyze by pure play mortgage buyers as it removes a significant amount of credit risk associated with the bond extending,” said Deutsche Bank analysts. “This in conjunction with lower severities and the rating on the M1 could expand the potential investor base significantly, driving spreads tighter.”