Fannie Mae is marketing its second offering of the year of Connecticut Avenue Securities (CAS) transferring the risk on mortgages that it insures.
CAS are general obligations of Fannie Mae, but the performance of the notes is linked to credit performance of a pool of reference loans. The Series 2016-C02 is also Fannie Mae’s the third transaction offering exposure to actual losses on a pool of mortgages, as opposed to estimated losses, according to Moody’s Investors Service, which is rating the deal.
Unlike the previous transaction, CAS 2016-C01, which is backed by two reference pools of loans, the notes in CAS 2016-C02 are backed by a single reference pool of loans with loan-to-value ratios (LTV) between 60.01%-80% that were acquired between March 1 and May 31, 2015. The loans are seasoned by 9.1 months, on average.
By comparison, in the previous transaction there were two series of notes backed by two separate pools of loans, one with LTVs below 80% and with LTVs above 80%.
The credit quality of the reference pool for CAS 2016-C02 is similar to that of the lower LTV pool backing CAS 2016-C01, according to Moody’s. There are 146,193 prime, fully amortizing, fixed-rate, one-to-four unit, first-lien conforming loans totaling $36.035 billion. The weighted average original LTV of the pool is 74.92% and the weighted average FICO is 752.
The loans were originated on or after October 1, 2014 by various originators and acquired by Fannie Mae between March 1, 2015 and May 31, 2015. The largest three originators (by loan balance) are Wells Fargo Bank (12.23%), Quicken Loans Inc. (6.21%) and JPMorgan Chase Bank (2.90%).
Fannie Mae is not offloading all of the credit risk of the loans; it will retain at least 66% of the most junior tranches, incurring the first losses, 5% of the mezzanine tranche, and 100% of the senior tranches. This aligns the mortgage insurer’s interests strongly with those of investors in the deal, according to Moody’s. However, the presale report states that Fannie Mae “may have incentives to work out breaches of sellers' loan representations and warranties and servicers' breaches of servicing obligations in ways other than requiring such seller or servicer to repurchase the related mortgage loans,” which would not be in the best interest of investors.
Pricing for the 1M-1 tranche, which is expected to be rated Baa3 by Moody’s and BBB+ by KBRA, was one-month LIBOR plus a spread of 215 basis points; that’s wide of the 195 basis point spread on the comparable tranche of the previous deal.
Pricing for the 1M-2 tranche, rated B1/BB, was one-month LIBOR plus a 600 basis points; well inside the 675 basis point spread on the comparable tranche of the previous deal.
Pricing for the 1B tranche, which is unrated, was one-month LIBOR plus 1225 basis points, outside the 1175 spread for the previous deal.
Bank of America Merrill Lynch and Wells Fargo Securities are the deal’s co-lead managers; Barclays Capital, BNP Paribas Securities, JPMorgan Securities, and Nomura Securities are co-managers.