Freddie Mac is marketing its fourth offering of securities offloading the credit risk of super-conforming mortgages that it insures.

The $460 million Freddie Mac Whole Loan Securities Trust 2016-SC02 is backed by two pools of fixed-rate, first lien loans that the government sponsored enterprise acquired from multiple sellers between May and September of this year. The trust will issue two tranches representing 94% of the underlying assets that are guaranteed by Freddie Mac and are unrated.  There are also two mezzanine tranches that are not guaranteed and so transfer credit risk to their holders. The $18.39 million M1 tranche is rated Baa1 and a $4.6 million M2 tranche is rated Ba2 by Moody’s Investors Service. There is also an unrated $4.59 million tranche that will bea the first 1% of losses.

All of the notes have legal final maturity of October 2046.

In addition to guaranteeing the senior certificates, Freddie Mac will initially retain a 5% vertical slice of the initial balance of each of the subordinate certificates on the closing date. This aligns the company’s interests with those of all security holders in the transaction.

The loan sellers are Fremont Bank (37.0%), Caliber Home Loans (28.9%), Wells Fargo Bank (20.0%) and Quicken Loans, Inc. (14.2%).

Bank of America Merrill Lynch, Wells Fargo, Barclays and Castle Oak are the underwriters.

There are limits to the amount of “super conforming” loans – those between $417,000 and $729,000 – that Freddie and sister agency Fannie Mae can bundle into standard mortgage-backed securities. Rather than leave these loans on its books, Freddie Mac securitizes them in separate transactions.

This is very different than the company securitizes regular conforming loans, bundling them into mortgage bonds that are fully guaranteed and then offloading the credit risk via various kinds of transactions including credit-linked notes and reinsurance policies.

The loans backing Trust 2016-SC02 have a credit risk profile similar to that of Freddie’s previous three transactions, according to Moody’s.

Moody’s expected losses for pool 1 average 0.45% in a base-case scenario and reach 6.05% at a stress level consistent with Aaa rating on the senior classes. Its expected losses on pool 2 average 0.85% in a base-case scenario and reach 11.40% at a stress level consistent with Aaa rating on the senior classes. The rating agency’sr aggregate expected loss on the combined collateral is 0.55%, and reaches 7.10% at a stress level consistent with Aaa rating.

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