Fannie Mae priced its first risk-share transaction of the year at tighter spreads across the capital structure when compared to the issuer’s previous transaction issued in November last year.
Called Connecticut Avenue Securities 2015-C01, Fannie’s sixth risk transfer transaction sold $1.5 billion of notes backed by a $50.2 billion pool of mortgages with original loan-to-value ratios (LTV) of up to 97 percent, according to a company press release.
Similar to prior deals of this type, two separate loan groups were sold. The offered notes are Fannie Mae’s senior unsecured obligations that are linked to the credit performance of two reference portfolios of residential mortgages held in various Fannie-guaranteed MBS.
Pricing for the 1M-1 tranche was 150 basis points over one-month LIBOR. By comparison the Series 2014-C04 sold the 1M-1 tranche at 196 basis points over one-month Libor.
The 1M-2 tranche of the 2015-C01 was sold at a spread of 430 basis points over one-month Libor, 60 basis points tighter than the previous deal.
The pricing spread for notes referenced by the second loan group, which is referenced by a pool of mortgages with higher LTVs than group one, also tightened considerably from pricing on the 2014-C04 transaction. The 2M-1 tranche priced at 150 basis points over one-month Libor compared to 210 basis points for the 2M-1 sold in the previous deal.
The 2M-2 tranche sold on the current deal priced 45 basis points tighter than the previous deal at 455 basis points over one-month Libor. Fannie stated that the notes were purchase by broad group of buyers that included both new and existing investors.
Fitch Ratings expects to assigned a BBB- ratings to the 1M-1 tranche; DBRS plans to rate the tranche BBB’. The 2M-1 tranche is expected to receive ratings of triple-B by both credit rating agencies. The 1M-2 tranche and 2M-2 tranche were not rated. Fannie Mae retained the first loss and senior piece of the structure, as well as a vertical slice of the M1 and M2 tranches in both groups in order to align its interests with investors throughout the life of the deal.
Bank Of America Merrill Lynch is the lead manager and J.P. Morgan Securities is is the co-lead manager.
The $50.2 billion reference pool for the Series 2015-C01 transaction contains over 234,000 single-family mortgage loans and consists of eligible loans acquired from September through November of 2013, part of Fannie Mae’s new book of business.
The loans are fixed-rate, generally 30-year term, fully amortizing mortgages and the reference pool is subdivided into two loan groups by original LTV. Group one includes loans with original LTV ratios between 60% and 80% percent. Group two includes loans with original LTV ratios between 80% and 97%.
Compared with CAS 2014-C03, the last Fannie Mae risk share transaction rated by Fitch, the pool includes an increased share of newly originated, purchase loans, according to the Fitch presale. Group one of the issuer's current transaction includes 63% of purchase loans, group two includes 89% of purchase loans. CAS 2014-C03, issued in December 2014, included 39% of purchase loans in the pool backing the group one securities and 71% of purchase loans in the pool backing group two securities.
The biggest difference between a purchase loan and a refinance loan is that in the former the customer generally does not have to pay closing costs and settlement charges for the refinance out of their pocket - the costs are included in the loan amount, which leads to a lower probability of default.
However the loans also typically have higher loan-to-value and lower FICOs. As a result, Fitch said the weighted average (WA) FICO has fallen while WA loan-to-value (LTV) has risen in both groups.
For group one the WA FICO is 753 and the WA LTV is 76.9% and group two has WA FICO of 749 and WA LTV of 92.65%. By comparison group one of Fannie Mae’s CAS 2015-C03 transaction has a WA FICO of 761 and a WA LTV of 75%; group two has a WA FICO of 754 and loans had a WA LTV of 92%.
The objective of the transaction is to transfer credit risk from Fannie Mae to private investors with respect to the $50.19 billion pool of mortgage loans held in previously issued MBS guaranteed by Fannie Mae. The transaction effectively mimics a credit-linked note structure with the principal repayment of the notes subject to the performance of a reference pool of mortgage loans.
