There’s a lot to like about Freddie Mac’s Structured Agency Credit Risk notes, which provide investors with exposure to the risk of defaults on conforming mortgages. That’s something currently unavailable in any other form. Legacy residential mortgage bonds are backed by subprime and Alt-A loans, while post-crisis RMBS is backed almost exclusively by jumbo loans.
The potential demand for this kind of product is huge: the $900 billion in face value of outstanding legacy RMBS is paying down at a rate of about $80 billion a year. The money managers that hold this paper will likely want to replace the exposure, assuming the new securities are sufficiently liquid. If rated, STACR notes could also see plenty of demand from banks and insurance companies.
The deal was attractively priced versus comparable private-label residential and commercial mortgage-backed securities, though less so after tightening in the secondary market.
The transaction also informs the debate about the future of housing finance, and not just because it provides a market-based indicator for guarantee fees. The more credit risk private investors assume from taxpayers, the less urgency there is to do away with Freddie and sister agency Fannie Mae. If the GSEs wanted to devise a structure that keeps them in the game longer, this is it.
As I explain in my cover story, the big question for investors is whether the STACR transaction was a one-off, or if issuance will be regular enough to create a deep, liquid market. Freddie has said it is looking at other structures, including credit linked notes. And Fannie is believed to be working on a different kind of risk-sharing transaction, which could redefine the approach for both GSEs.
Felipe Ossa looks at another kind of risk transfer in his story about the New York Metropolitan Transit Authority’s inaugural catastrophe bond. The MTA tapped this market out of necessity, as capacity in the reinsurance market retrenched in the wake of Hurricane Sandy; it was pleased with its reception.
There’s a storm of another kind in rate reduction bonds. Nora Colomer reports that two recent deals by Ohio utilities were priced against unconventional benchmarks, prompting sharp criticism from an advisor not involved in the deals.
And John Hintze talks to players in the equipment leasing market about the likely impact of proposed changes to accounting rules. It’s a mixed bag: leasing may become more costly for lessees, perhaps leading them to buy instead, but it will be more attractive for lessors to securitize the leases they do make.
Collateralized loan obligations have been one of the most active sectors of the new issue market, particularly since the summer doldrums kicked in, but Karen Sibayan reports that this activity hasn’t done much to shake up the latest manager rankings from Moody’s Investors Service.