Freddie Mac upsized its latest offering of risk-sharing notes, demonstrating investor demand for the first loss position when homeowners stop making mortgage payments.
Credit Suisse and Bank of America Merrill Lynch were co-lead managers and joint bookrunners on the $860 million Structured Agency Credit Risk (STACR) Series 2015-HQ1, which references a pool of recently-originated, single-family loans with an unpaid principal balance of more than $16.5 billion. The loans are made to borrowers who have between 5% and 20% of the equity in their homes.
The mortgage giant had originally offered $725 million of notes.
"Investor demand for the HQ deal was high, and we were able to make a modest upsize of the transaction," said Mike Reynolds, Freddie Mac vice president of credit risk transfer.
This is Freddie’s second risk-sharing deal of the year. Like the one completed in January, it offers investors exposure to the risk of first loss, through issuance of B notes, when borrowers stop making payments. Previous deals required losses to reach a threshold before the company received funds to cover them.
The B notes were priced to yield 1075 basis points over Libor, less than 1150 basis points on the B notes Freddie issued in February. That’s despite the fact that the B notes of the current deal absorb the first 150 basis points of losses, compared with just the first 100 basis points of losses on the same tranche of the previous deal.
The M3 tranche, which absorbs the next layer of losses, pays Libor plus 380; the M2 tranche pays Libor plus 220 basis points and the M1 tranche pays Libor plus 150 basis points.
The M-1, M-2 and M-3 classes will be rated by Kroll Bond Rating Agency, Inc. and Moody's Investors Services,
As with the previous deal, Freddie will hold a portion of the B notes as well as a portion of the class M-3 notes, M-2 and M-1 notes. It will also hold the senior loss risk.