Freddie Mac’s next STACR offering will offer investors exposure to actual losses on residential mortgages, something the mortgage giant says investors have been asking for.

Structured agency credit risk notes act as a kind of reinsurance: they are general obligations of the Freddie Mac, but the mortgage giant can hold on to interest or principal if losses on a reference pool of mortgages reach a predetermined level. All previous offerings measured these losses using a “fixed severity” approach. Essentially, investors took a hit once loans were delinquent for more than 180 days. Loans six months behind on payments are assumed to be headed for default and a portion of the principal of these loans is repaid. The portion of the principal repaid is determined by the typical loss severity on loans in the reference pool.

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