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Freddie Mac prices first-ever credit risk transfer linked to SOFR

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Freddie Mac has issued its first credit risk transfer deal linked to the Structured Overnight Financing Rate that is being pushed as the leading alternative to the soon-to-be discontinued Libor.

"As a member of the Alternative Reference Rates Committee, Freddie Mac has been a leader in the shift from Libor to SOFR," said Mike Reynolds, vice president, single-family CRT in a press release. "SOFR has multiple benefits to our CRT investors and Freddie Mac. The transaction volumes underlying SOFR are increasing across different fixed-income products, and now CRT is in that category."

The underlying single-family mortgages in the nearly $1.1 billion Structured Agency Credit Risk program transaction have low loan-to-value ratios, between 61% and 80%. They were securitized between April 1 and May 15, although they could have been originated as early as the start of 2015, Freddie Mac said.

This is the fifth transaction of this type in 2020, with the most recent one taking place in August. The latest deal, STACR REMIC 2020-DNA5, is structured to use the 30-day average SOFR published daily by the Federal Reserve Bank of New York as the reference rate. But Freddie Mac intends to transition this transaction, and future CRT transactions, to an International Organization of Securities Commissions compliant one-month term SOFR, if the appropriate regulatory authority approves such a rate.

Once that one-month term SOFR is ready and administratively feasible, Freddie Mac expects to cease making new issuances that use a compound average of SOFR and to solely use the term SOFR. However, at this point there is no estimate when or if such a rate will be endorsed by the ARRC and approved for use.

Earlier this year, Freddie Mac, in conjunction with Fannie Mae and the Federal Housing Finance Agency, issued a timeline detailing the switch to SOFR-based products, which indicated it could start issuing CRT linked to that rate in the fourth quarter. Fannie Mae is not expected to do SOFR CRT until next year.

There were four tranches of the transaction priced for sale, all at the 30-day average SOFR plus a spread: the M-1 class at a spread of 130 basis points, the M-2 class with a spread of 280 bps, the B-1 class has a spread of 480 bps and the B-2 class has a spread of 1,150 bps.

Freddie Mac is retaining the senior loss risk A-H bond and the first loss B-3H bond. It also retains a portion of the risk in the class M-1, M-2, B-1 and B-2 tranches.

BofA Securities and Nomura are co-lead managers and joint bookrunners for the deal.

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Credit risk transfers Freddie Mac SOFR LIBOR Risk management RMBS GSEs Fannie Mae Underwriting