Investors taking on exposure to actual losses on mortgages insured by Fannie Mae appear to be doing their homework.

The mortgage giant’s first Connecticut Avenue Securities transaction offloading the risk of actual loss priced wide of the previous deal, completed in July. That deal, like all previous CAS, offered exposure to estimated losses.

But spreads weren’t just wider, they were more tiered.

Pricing for the 1M-1 tranche, which is linked to the performance of group of loans with lower loan-to-value ratios and is rated ‘BBB-‘ by Fitch and ‘BBB’ by DBRS, was one-month LIBOR plus a spread of 160 basis points.

Pricing for the 2M-1 tranche, linked to a group of higher LTV loans and is also rated BBB-/BBB, was one-month LIBOR plus a spread of 170 basis points. 

By comparison, the 1M-1 and 2M-1 tranches of the previous CAS offering, completed in July, both pay Libor plus 150 basis points.

Pricing for the junior, unrated 1M-2 tranche, was one-month LIBOR plus 570 basis points.

Pricing for the junior, unrated 2M-2 tranche was one-month LIBOR plus a spread of 555 basis points.

By comparison, the 1M-2 and 2M-2 tranches of the previous deal both pay Libor plus 500 basis points. 

Over the past few months, Fannie Mae has begun providing additional disclosure about the way loans are underwritten and serviced, in anticipation of an actual loss deal, which will be the standard for the CAS program going forward. The $1.45 billion note offering is scheduled to settle on October 27.

 “The move to an actual loss structure for CAS places even greater importance on how Fannie Mae manages credit risk, as investors now directly benefit from our comprehensive credit risk management approach,” said Laurel Davis, vice president for credit risk transfer at Fannie Mae. “Because we are actively involved from pre-loan delivery through property disposition, investors have greater confidence in the loans in the CAS reference pools and their opportunity to invest in them. The fact that we are setting strong standards and managing the credit risk of loans throughout the lifecycle has helped investors become comfortable and re-enter the residential credit market. We look forward to another strong year for the CAS program in 2016.” 

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