Freddie Mac has moved from transferring the credit risk on newly originated loans to older loans that have been modified in order to avoid default.

The latest transaction, Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2016-1 is a securitization of $943.5 million of mortgages to borrowers who were once delinquent but have been modified and have been making timely payments for at least 37 months.

Freddie is holding on to the senior notes to be issued, which are unrated but are guaranteed, as well as the riskiest slice of bonds, which take the first losses. It’s selling two mezzanine tranches, the $33 million M1 tranche, rated BBB (low) by DBRS, and the $94.4 million M2 tranche is rated B (low).

The loans used as collateral were either purchased by Freddie Mac from securitized Freddie Mac Participation Certificates or retained by Freddie Mac in whole loan form since their acquisition

They are divided into two groups. Group H is comprised of 2,203 first lien mortgage loans that were subject to step rate modifications, and have a weighted average updated FICO score of 6911and a weighted average (WA) current Loan-To-Value Ratio (LTV) of 87%2. The total unpaid principal balance of Group H mortgage loans is $537,765,632 which includes $108,123,800 of non-interest bearing deferred principal balance

Group M is comprised of 1,861 first lien mortgage loans that were subject to fixed rate modifications, and have a weighted average (WA) updated FICO score of 668 and a WA current loan-to-value Ratio (LTV) of 94%. The total unpaid principal balance of Group M mortgage loans is $396,502,072 which includes $87,103,839 of non-interest bearing and deferred principal balance.

Select Portfolio Servicing is the servicer.

Loans that have already defaulted are generally considered to be at higher risk of redefaulting. However, DBRS noted in its presale report that the collateral backing the Series 2016-1 are generally of better quality than other distressed or re-performing portfolios that it has reviewed. Although all loans have been modified, none have been late for at least the past 36 months. In addition, borrower credit scores and updated loan-to-value (LTV) ratios are generally stronger than other reperforming portfolios reviewed by the rating agency.

Freddie did not disclose pricing; however a spokeswoman said that the company is pleased with the pricing levels and investor interest. 

Freddie, as well as sister mortgage company Fannie Mae, purchase mortgages from banks and repackage them as collateral for mortgage bonds. They provide a credit guarantee for the bonds, repurchasing mortgages that go bad. The two companies are required by their regulator to offload some this credit risk, to avoid putting taxpayers on the hook. They do this through a variety of transactions with capital markets investors and insurance companies that effectively reinsure the mortgages.

This Seasoned Credit Risk Transfer transaction does not help Freddie with its regulatory quota, which only applies to newly purchased loans. But it does help Freddie meet a mandated reduction on the amount of mortgage-related investments it holds on its books, to $250 billion from $303.86 billion currently.

As of Sept. 30, the company had $60 billion of reperforming mortgages in its portfolio, according to regulatory filings.

Until now it has reduced its exposure to bad loans by selling them outright or securitizing them. Since 2011, it has securitized $25.9 billion of re-performing and modified performing mortgages.

Freddie, as well as sister mortgage company Fannie Mae, purchase mortgages from banks and repackage them as collateral for mortgage bonds. They provide a credit guarantee for the bonds, repurchasing mortgages that go bad. The two companies are required by their regulator to offload some this credit risk, to avoid putting taxpayers on the hook. They do this through a variety of transactions with capital markets investors and insurance companies that effectively reinsure the mortgages.

This Seasoned Credit Risk Transfer transaction does not help Freddie with its regulatory quota, which only applies to newly purchased loans. But it does help Freddie meet a mandated reduction on the amount of mortgage-related investments it holds on its books, to $250 billion from $303.86 billion currently.

As of Sept. 30, the company had $60 billion of reperforming mortgages in its portfolio, according to regulatory filings.

Until now it has reduced its exposure to bad loans by selling them outright or securitizing them. Since 2011, it has securitized $25.9 billion of re-performing and modified performing mortgages.

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