Freddie Mac has launched its initial offering of bonds with exposure to actual losses on mortgages that it ensures.

Structured Agency Credit Risk Debt Notes, Series 2015-DNA1 serve as reinsurance on $31.9 billion pool of mortgage loans backing MBS guaranteed by Freddie Mac. The notes are general obligations, but mortgage giant can hold on to interest or principal if loans in the reference pool default.

All previous offerings STACR measured losses using a “fixed severity” approach. Essentially, investors take a hit once loans referenced in these deals are delinquent for more than 180 days. Loans six months behind on payments are assumed to be headed for default and a portion of the principal of these loans is repaid. The portion of the principal repaid is determined by the typical loss severity on loans in the reference pool.

Last month Freddie announced plans to start offering exposure to actual losses, something it says that investors have asked for. At the time it did not provide any information about how late payments or other kinds of credit events would affect cash flows to note holders. In private label mortgage-backed securities, the servicer typically advances missed payments for a period of time, but there is no such party in a STACR.

A presale report published today by Fitch Ratings provides some details. Loans modified to reduce the principal will remain in the reference pool; e pool; however the amount forgiven will be treated as a “principal curtailment,” or early principal payment, and paid to the notes. If the borrower subsequently defaults, the forgiven amount will be included in a calculation of the realized loss and passed through to the noteholders. In this case, the noteholders will experience the same loss amount had the loan not had a principal forgiveness modification.

The reference mortgage loan pool consists of 135,794 loans totaling $31.9 billion that were acquired by Freddie Mac in fourth-quarter 2012 and have weighted average (WA) current combined loan-to-value (CLTV) of just 62%, according to Fitch. The WA debt-to-income (DTI) of 32.1% and credit score of 766 reflect the strong credit profile of post-crisis mortgage originations. The reference pool also benefits from significant geographic diversity, with the largest metropolitan statistical area accounting for 9.1%.

Approximately 0.9% and 0.1% of the reference pool missed either one or two payments in the prior two years. All have been current for the past 12 months.

The M-1, M-2 and M-3 notes to be issued by the trust will have 12.5-year legal final maturity, as opposed to the 10-year maturity for prior STACRS. Thus any credit events on the reference pool that occur after twelve and a half years will be borne by Freddie Mac.

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