Freddie Mac priced its latest offering of notes transferring mortgage credit risk at much narrower spreads than the previous deal, completed in March.
Structured Agency Credit Risk (STACR) notes are general obligations of Freddie Mac, but their performance is tied to a pool of residential mortgage insured by the government sponsored enterprise. As loans liquidate or other credit events occur, the outstanding principal balance of the debt notes will be reduced by the actual loan's loss, including the borrower's delinquent interest.
The latest offering, the $916 million STACR Series 2016-DNA2, has a reference pool of recently-acquired single-family mortgages with an unpaid principal balance of more than $30 billion.
The M-1 class, which is rated triple-B by Standard & Poor’s, yields 125 basis points over one-month LIBOR; 50 basis points less than the equivalent tranche of the March deal.
The M-2 class, rated triple-B-minus, yields LIBOR plus 220 basis points, 55 basis points less than the same tranche of the earlier deal.
The M-3 class, rated single-B, pays LIBOR plus 465 basis points, 170 basis points less than the earlier deal
And the unrated B class pays LIBOR plus 1050 basis points, 225 basis points less than the earlier deal.
The reference pools of the two deals are very similar. STACR 2016-DNA2’s consists of conforming residential mortgage loans with a weighted average FICO score of 752 and the average loan balance is roughly $236,000. Freddie Mac acquired them between July and September 2015.
The reference pool for the $475 million Series 2016-HQA1 also consists of a 30-year fixed-rate single-family mortgages; they were acquired by Freddie Mac between April and June of 2015; the pool consists of loans with original loan-to-value ratios of between 60% and 80% and weighted average credit score of 754.
Mike Reynolds, vice president of credit risk transfer for Freddie Mac, attributed the cheaper cost of reinsurance to “market conditions,” which he said have continued to improve from their lows earlier this year.
As with other STACR, Freddie Mac holds the senior loss risk in the capital structure, and a portion of the risk in the Class M-1, M-2, M-3, and B Bonds.
Nomura Securities and Bank of America Merrill Lynch are co-lead managers and joint bookrunners.