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Freddie beats Fannie to market with REIT-friendly risk-sharing deal

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Freddie Mac has launched a new type of credit risk transfer security designed to attract additional investors to the program.

Called Structured Agency Credit Risk Securitized Participation Interests, the new securities differ from other types of STACR securities in one important aspect: they are backed by mortgage loans, and are not general obligations of the government-sponsored enterprise.

The inaugural, $50 million issue will be backed by 3,231 first-lien, conforming and super-conforming, fixed-rate mortgages with current principal of $1.25 billion.

The loans will be housed in a participation interest trust, which will issue unguaranteed certificates backed by participation interests in a specified portion of the loans. The remaining percentage in each mortgage loan will be evidenced by a participation interest that will be used as collateral for Gold PCs — the cornerstone of Freddie’s mortgage bond program. A REMIC election will be made with respect to the STACR SPI Trust.

STACR notes are the primary way that Freddie offloads the risk of default on mortgages that it insures, and the investor base has continued to expand since they were introduced in 2013. However, as general obligation bonds, the two existing programs, STACR DNA and STACR HQA, do not qualify as eligible assets for real estate investment trusts, limiting the participation of this sector.

Fannie Mae has also said it is looking at new structures for its benchmark Connecticut Avenue Securities program to increase to make it more REIT-friendly.

Three tranches of notes will be issued in the inaugural STACR SPI transaction: $20.6 million of Class M1 notes with preliminary ratings of Baa3 from Moody’s Investors Service,$16.9 million of Class M-2 notes with preliminary B2 ratings and $12.5 million of unrated Class B2 notes.

Bank of America Merrill Lynch is lead manager and bookrunner.

All of the loans used as collateral satisfy Freddie’s underwriting requirements, are current, have never been 30 or more days delinquent, and are outside of Federal Emergency Management Agency-designated disaster zones in which FEMA has authorized individual assistance to homeowners in such county as a result of Hurricane Harvey, Hurricane Irma or Hurricane Maria, according to Moody’s.

The weighted average FICO score for the pool is 757. The weighted average original LTV for the pool is 77.4%, which Moody’s noted comparable to the loans in the STACR DNA program.

However, a large portion of the pool (32.1%) has an original LTV greater than 80% but is covered by mortgage insurance at origination.

Unlike the STACR notes Freddie has issued to date, the rated certificates to be issued in the new transaction do not have a 12.5 year bullet maturity payment. “As a result, the certificate holders are exposed longer to any loans with defects,” Moody’s noted in a presale report published Monday.

However, Moody’s takes some comfort from the fact that Freddie will retain a 5% vertical slice of the subordinate certificates that are being issued in order to align its interest with those of investors.

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Credit risk transfers GSEs Secondary market REITs Fannie Mae Freddie Mac