As policymakers debate ways to reduce Fannie Mae and Freddie Mac’s role in the U.S. mortgage market, one of the big questions that must be addressed is how much credit risk private investors are willing to take on, and at what price. A new type of security issued by Freddie Mac provides some of the first answers.

Called “Structured Agency Credit Risk,” or STACR [rhymes with ‘slacker’] notes, the securities are unsecured obligations of the government sponsored enterprise; yet their principal repayment is based on the prepayments and defaults on a reference pool of more than $20 billion of residential mortgages acquired by Freddie in the third quarter of 2012. They provide a form of credit enhancement to Freddie, assuming some, but not all, of the risk of the underlying loans.

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