Fannie Mae has priced its Connecticut Avenue Securities (CAS), the series 2016-C04, at tighter spreads to its previous deal, completed in April.

CAS is the primary way that Fannie Mae offloads the credit risk on mortgages that it insures to capital markets investors, reducing taxpayer exposure to any losses. The notes are general obligations of the company, but are linked to the performance of a pool of mortgages that Fannie Mae acquired and subsequently securitized. Should borrowers fall behind on payments or default, the government-sponsored enterprise could write down the value of CAS notes.

All of the mortgages in the reference pool for the series 2016-C04 were acquired by Fannie Mae between July 1, 2015 and October 31, 2015 and have loan to value ratios between 60% and 80%. By comparison, the GSE’s previous deal, completed in April, was linked to mortgages with LTVs of over 80%.

Pricing for the 1M-1 tranche, rated Baa3 by Moody’s Investors Service and BBB by KBRA, was one-month LIBOR plus a spread of 145 basis points.

Pricing for the 1M-2 tranche, rated B1 by Moody’s and BB by KBRA, was one-month LIBOR plus 425 basis points.

Pricing for the unrated 1-B tranche was one-month LIBOR plus 1025 basis points.

Fannie Mae will retain a portion of the 1M-1, 1M-2, and 1-B tranches in order to align its interests with investors throughout the life of the deal.

Bank of America Merrill Lynch was the lead structuring manager and joint bookrunner and Barclays Capital was the co-lead manager and joint bookrunner on this transaction. Citigroup, Credit Suisse, J.P. Morgan, and Wells Fargo Securities were co-managers.

The $1.32 billion note offering is scheduled to settle on Thursday, July 28

“Demand for CAS bonds remains strong and investors continue to show interest in the strength of the U.S. housing market,” Laurel Davis, Fannie Mae’s Vice President of Credit Risk Transfer, said in a press release. She added that the securities have performed well and we continue to see active trading in secondary markets, despite recent market uncertainties due to Britain’s vote to exit the European Union.

By comparison, the spread on the 1M-1 tranche of the April deal was Libor plus 200 basis points, the spread on the 1M-2 tranche was Libor plus 530 basis points, and the spread on the 1-B tranche was Libor plus 1175 basis points.bbbbb

After this transaction is completed, Fannie Mae will have brought 13 CAS deals to market since the program began, issued $16.9 billion in notes, and transferred a portion of the credit risk to private investors on single-family mortgage loans with an outstanding unpaid principal balance of approximately $580 billion. Since 2013, Fannie Mae has transferred a portion of the credit risk on approximately $700 billion in single-family mortgages through all of its risk transfer programs.

“Demand for CAS bonds remains strong and investors continue to show interest in the strength of the U.S. housing market. Our credit risk transfer securities have performed well and we continue to see active trading in secondary markets, despite recent market uncertainties due to Brexit,” said Laurel Davis, vice president of credit risk transfer, Fannie Mae.

Fannie Mae’s next offering of CAS will be linked to loans with LTVs above 80%, which carry primary mortgage insurance. It is scheduled for August. The following transaction will be in October. 

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