Last week Freddie Mac announced the launch of its Reference REMIC securities program. This program is aimed at enhancing CMO market liquidity and offering the regular issuance of generic structures with more pricing transparency.
Mark Hanson, vice president in mortgage funding at Freddie, said this new offering borrows a lot from the GSE's Reference Note program on the debt side - which offers very large, liquid, bullet maturity securities with a calendar announcing issuance timing - in terms of the new security's liquidity and predictability. He added that the new REMIC is a throwback to some of the earlier REMIC deals, which were much more straightforward and involved less analytic capabilities to determine the risk and return, thus becoming more appealing to the common investor. The new offerings would be targeted to three different investor groups: asset-backed investors (who typically like shorter maturities), foreign investors and traditional REMIC investors who have been turned off by the lack of liquidity and transparency in the REMIC market.
The first Reference REMIC - scheduled to come to market today - would be distributed through a syndicate of dealers, which is unique, as previously only one dealer would gather the collateral and distribute the securities. Freddie Mac would now be paying dealers a fee, as opposed to the other way around, so that the GSE could be more demanding about the liquidity that these dealers create. Freddie Mac said that the minimum issuance size for each Guaranteed Maturity Class tranche will be $1 billion with the initial security expected to be at least $2 billion - the large size supposedly not typical of the REMIC market.
Hanson said transparency and predictability are key elements in this endeavor. Pricing details on the securities such as intraday indications and daily closing prices from the lead managers will be displayed over third-party data vendors. One vendor, Thomson TradeWeb, will also offer electronic trading of these Reference REMIC securities starting in May. Hanson said they would also be publishing the underlying collateral on these deals, which will likely primarily be fixed-rate TBA, letting investors know how much issuance is coming in and in what sectors. For example, whether the deal would be backed by 15- or 30-year fixed rates. Reference REMIC securities will be issued based on a quarterly issuance calendar of intended offerings with at least one, but no more than two issuances per quarter, although there may be multiple offerings from each tranche. For instance, each tranche would have its own CUSIP, with the subsequent offerings from the tranche sharing the same CUSIP. "This is done so that investors could be comfortable shorting the security," said Hanson, adding that this would also result in tighter bid offer spreads.
These Freddie securities would be featuring stated final maturities. Freddie Mac would effectively guarantee the last cashflow on these transactions by buying the tail of the underlying REMIC, thus protecting against extension risk in these securities. This feature is beneficial in a rising interest rate scenario, Hanson added.
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