Fannie Mae and Freddie Mac could triple issuance of securities linked to the performance of mortgages that they insure under goals released by their regulator today.
The Federal Housing Finance Agency’s 2014 Scorecard calls for the government-sponsored enterprises to increase unpaid principal balance transfers to approximately $90 billion this year from $30 billion in 2013.
So far this year, the GSEs have completed three offerings of notes whose performance is linked to defaults on mortgages. Freddie has issued two of its Structured Agency Credit Risk (STACR) deals, one in February and one in early April. Fannie priced an offering of Connecticut Avenue notes in February. It is reportedly planning a second deal this month.
Both the STACR and Connecticut Avenue programs were launched in 2013; in addition Fannie and Freddie have used different types of insurance-based transactions. In each transaction, the GSE retained a small first loss position in the underlying loans, sold a significant portion of the risk beyond the initial loss, and then retained the catastrophic risk in the event losses exceeded the private capital support.
Not all of this year’s risk transference will be accomplished with these existing programs, however. The FHFA also expect the GSEs to try new risk transfer structures in order to assess sustainability in different market conditions.
“Despite investor demand for recent credit-risk products issued by the enterprises, the long-term prospects of a robust investor base are yet to be tested,” FHFA Director Melvin L. Watt said in the prepared remarks for a speech delivered today.
“Executing multiple types of risk-sharing transactions will improve the prospects of a broad, diversified and sustainable investor base,” he said. “It will also enable the enterprises to develop transaction structures that are scalable and possible to execute in different market conditions.”
The risk transfer targets are part of a broader goal of bringing additional private capital into the mortgage market, and, in doing so, reduce the risks assumed by U.S. taxpayers when Fannie and Freddie insure and securitize mortgages. The FHFA is also requiring the GSEs to reduce their holding of mortgage backed securities to no more than $250 billion each by 2018.
Additionally, Watt clarified the agency's top objective for a "Common Securitization Platform," an effort begun last year as a way to combine Fannie and Freddie's securitization processes. Watt suggested he would be proceeding slowly on the project, saying the focus should be to "de-risk" it.
"We found that, because of the many variables involved, the main danger to the CSP effort would be pursuing too many objectives all at the same time," said Watt. "Since any stumbles along the way could have ripple effects in the $10 trillion housing finance market, there's a lot at stake in getting this right."
Instead, he said the emphasis should be on a "seamless transition" from the current technology used by Fannie and Freddie to issue new securities to a joint venture that operates with one system using new technology.
Analysts at J.P. Morgan took this as a sign that there will be a longer timetable for the transition. In a report published today, they said that this is “slightly negative” for Freddie's mortgage bonds, which typically trade at a slight yield premium relative to Fannie's.