Fannie Mae’s latest offering of Connecticut Avenue Series (CAS) notes credit risk of mortgages it insures priced wide of its previous deal.
The performance of the CAS 2015-C03 notes is linked to defaults on a $48 billion pool of mortgages.
Pricing for both the 1M-1 tranche (rated BBB- by Fitch and A3’ by Moody’s Investors Service) and the unrated 1M-2 tranche was one-month LIBOR plus a spread of 150 basis points. The comparable tranches of Fannie Mae’s previous CAS, completed in May, priced at LIBOR plus 115 and LIBOR plus 120, respectively.
The performance of both tranches is linked to subset of mortgages to borrowers with significant equity in their homes; loan-to-value (LTV) ratios range from 60% to 80%.
The spread differential for two tranches linked to mortgages with higher LTVs, from 80% to 97%, was even wider. Loans with higher LTVs are considered riskier because the borrowers have less equity and so are considered more likely to walk away if they cannot make mortgage payments.
Pricing for both the 2M-1 tranche (rated BBB- by Fitch and Baa1’by Moody’s) and the unrated 2M-2 tranche was one-month LIBOR plus 500 basis points. That’s 100 basis points wider than the comparable tranches of Fannie Mae’s previous deal, which priced at LIBOR plus 400 basis points.
All of the notes have a legal final maturity of 10 years. After that point, Fannie Mae is on the hook for any credit losses on mortgages in the reference pool.
Since the credit characteristics of the loans referenced in the latest CAS offering are similar to those referenced in the May transaction, the spread widening may be the result of overall market conditions.
“Despite various factors causing uncertainty in many global markets, we brought another successful CAS deal to the market and attracted new investors to the program,” said Laurel Davis, vice president for credit risk transfer at Fannie Mae, said in a press release.
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.
The $1.56 billion note offering is scheduled to settle on July 22.
Credit Suisse was the lead structuring manager and joint bookrunner and Citigroup was the co-lead manager and joint bookrunner on this transaction. Bank of America Merrill Lynch, Barclays Capital, BNP, and JP Morgan were co-managers, and Loop Capital participated as a selling group member.
Fannie Mae anticipates that CAS 2015-C03 will be the final deal in which credit losses are calculated by applying a fixed rate of severity to loans when they become 180 days delinquent. In the future, it plans to come to market with deals offering exposure to actual losses, something that rival Freddie Mac already offers. The first actual loss deal could come in the fourth quarter.
Well in advance of its first actual loss deal, Fannie Mae will release enhanced performance data on the single-family loans that it insures, including property disposition, and host web tutorials.
Since the program began in October 2013, Fannie Mae has issued $10 billion in notes through CAS and transferred credit risk to private investors on single-family mortgage loans with an outstanding unpaid principal balance of over $390 billion.
