Investors are demanding additional compensation for assuming the risk of default on mortgage insured by Fannie Mae.
Spreads widened on every tranche of the agency's most recent transaction under its Connecticut Avenue Series (CAS), its fourth this year and fifth overall.
The performance of CAS deals is tied to that of a set pool of mortgages that meet certain criteria set by Fannie. Unlike a securitization, the transactions remain on balance sheet. The reference pool for 2014-C04 consists of 235,000 mortgages with a balance of $54 billion.
Weaker mortgages can probably be ruled out as the reason for the spread widening on the Series 2014-C04 vs C03, completed in July— there is not an appreciable different in the quality of the reference pool between these two transactions, according to rating agency presale reports.
The 1M-1 tranche for $340.5 million priced at 196 basis points over one-month Libor. DBRS and Moody’s Investors Service gave it preliminary ratings of BBB’ and Baa2.’ By comparison, for Series 2014-C03, the 1M-1 tranche totaling $555 million priced at 120 basis points over one-month Libor. DBRS rated that tranche BBB’, Fitch Ratings BBB-.’ This, in turn, was a good deal wider than the 95-basis-point-spread on a comparable tranche in the Series 2014-C02.
The $578-million 1M-2 tranche in 2014-C04 priced at 490 basis points over, a good deal wider than the 300 basis-point-spread on the previous 1M-2 tranche, which was also appreciably larger at $945 million. That tranche, which is unrated, priced at 260 basis points in the earlier, 2014-C03 notes.
The spreads on other tranches gapped out as well.
The $205-million 2M-1 tranche priced at 210 basis points vs. 120 basis points in the $239-million 2M-1 notes of the previous deal. Ratings on this tranche were preliminary BBB (low)’ (DBRS) and Baa2’ (Moody’s) in 2014-C04, analogous to the ratings for 2M-1 in the prior deal.
Spreads widened the most in the unrated 2M-2 tranche.
This tranche of the 2014-C04 deal totaled $325 million and priced at 500 basis points over 1-month Libor. In the prior deal, it totaled $310 million and priced at 290 basis points over. The 2M-2 tranche is unrated.
The reference pool in both 2014-C04 and 2014-C03 is split into Group 1 and Group 2, with the latter having higher average loan-to-value (LTV) ratios. For C04, weighted average (WA) LTV was 76.4% in Group 1 and 92.2% in Group 2. The WA Fico of the borrowers in the pool was 757 and 753, respectively. The same metrics for C03 were very close.
Barclays Capital was the lead structuring manager on the latest deal, Credit Suisse the co-lead manager. Both were joint bookrunners. Co-managers include Bank of America Merrill Lynch, JP Morgan Securities, Citigroup and Nomura Securities International. Drexel Hamilton is a selling group member.
Fannie Mae indicated that it will continue issuing next year on a quarterly basis.
