The $500 million risk-sharing mortgage bond Freddie Mac issued last week, called STACR 2013-DN1 could be the first among many deals over the coming months and year, according to analysts at Barclays.
Barclays anticipates that if both Freddie Mac and Fannie Mae sell the risk on all their ongoing issuance, issuance volumes could potentially reach $20 billion to $25 billion per year.
Freddie's inaugural deal allows investors to purchase securities that are linked to a reference pool of residential mortgage loans purchased by the government sponsored enterprise. It helps shed the credit risk of the mortgages Freddie guarantees to the private sector, by issuing unsecured debt with cash flows that mimic a first-loss piece on the underlying reference collateral.
Freddie sold the 2.19-year, M1 notes at 340 basis points over the one month Libor and the 8.21-years, M2 class at 715 basis points over the one month Libor. The senior-most reference tranche, A-H, has 3% credit support and Freddie Mac retains the risk on this. The agency will also retain the risk on the junior-most tranche of the transaction.
The deal is one measure towards fulfilling the Federal Housing Finance Agency directive to execute various risk transfer transactions aimed at reducing the its footprint in housing finance.
As part of the FHFA’s updated Conservatorship Strategic Plan for 2013, the FHFA called for Fannie Mae and Freddie Mac to show the viability of risk transfer transactions involving single-family mortgages with at least $30 billion of unpaid principal balance in 2013.
While the first deal is unrated, Wells Fargo expects future deals will likely be rated in order to broaden investor potential. The lack of credit ratings in the inaugural deal meant some investors could not participate.
Going forward one source of potantial demand will come from existin non-agency MBS investors, which could account for $15 billion to $20 billion in demand, said Barclays. It thinks the program could also be suitable for REIT investors, insurance companies and money managers.