* Second risk-sharing mortgage-backed bond by GSE nears
* Regulator encourages Fannie mirror Freddie's structure
* Unrated deal gives investors access to MBS credit risk
By Adam Tempkin
NEW YORK, Sept 12 (IFR) - Government-supported mortgage
giant Fannie Mae will begin marketing its debut "risk-sharing"
mortgage-backed security (MBS) over the next two weeks,
according to three investors that have been briefed on the deal
and one investment banker.
The transaction will closely mirror a similar inaugural
US$500 million deal issued by sister agency Freddie Mac in July,
known as the Structured Agency Credit Risk (STACR) bond.
The purpose of this new class of so-called "risk-sharing"
MBS from the government sponsored enterprises (GSEs) is to sell
off some of the default risk of their residential mortgage
holdings to private investors willing to gamble on their pool of
The new bond programs come after the Federal Housing Finance
Agency (FHFA), a government regulator, directed both GSEs to
share out the risk on US$30 billion each of their loan
portfolios, as part of a wider initiative to minimize their vast
footprint in the US residential mortgage industry.
"We are working with the FHFA to meet the goals of the 2013
Conservatorship Scorecard," said Fannie Mae spokeswoman Callie
Bank of America Merrill Lynch will be lead underwriter on
the unrated Fannie Mae deal, but Credit Suisse, which led
Freddie Mac's STACR offering, will be heavily involved in the
transaction as well.
Bank of America Merrill Lynch and Credit Suisse declined
comment. The FHFA referred calls on to Fannie.
The two GSEs, which finance nearly 90% of the country's
mortgages, were put into US government conservatorship in 2008
after heavy losses incurred in the subprime mortgage meltdown.
The government now wants to scale back its involvement in
the mortgage business.
Investors say that the FHFA strongly encouraged Freddie Mac
to share its structuring technology with Fannie Mae in an
attempt to make the new class of products as homogeneous and
easily understandable to investors as possible.
LACK OF TRUST
Therefore, the Fannie Mae version will be structured
similarly to STACR - as an unsecured general obligation of the
GSE - rather than in a trust or special purpose vehicle (SPV)
structure via a credit-linked note (CLN), which may disappoint
some bond investors who held out hope that Fannie would use a
"A trust structure gives more certainty of protection to the
investor because it better segregates the cashflows away from
the GSEs, in case they were eventually to get wound down," said
one senior portfolio manager specializing in securitized
"An SPV, or trust, means you get repaid for the risk you're
taking from outside the Fannie Mae estate, which protects you in
case the GSEs go away at some point."
The STACR bonds sold some of the risk of future losses on a
nearly US$23bn pool of Freddie-Mac guaranteed residential
mortgages to private bond investors.
The structure is considered almost synthetic or credit
derivative-like, because they simply reference a pool of
recently originated GSE-guaranteed mortgages rather than being a
true sale of risk.
Freddie Mac originally intended to use a trust structure
when it was planning its deal last year, but encountered onerous
registration requirements and costs under new Dodd-Frank rules
governing swaps mandated by the Commodity Futures Trading
The rules would have defined a credit-linked note structure
as a "commodity pool" under CFTC guidelines, meaning an
increased regulatory burden. The GSE opted for an unsecured
general obligation structure instead.
Investors assumed that Fannie Mae might have more lead time
to get the appropriate licenses from the CFTC to register as a
derivatives user. According to investors, it looked closely at a
SPV structure this past spring, as it would have broadened the
appeal of the product, and hence the base of buyers.
However, bankers say that the structure just wasn't feasible
for the first round of STACR deals issued by the GSEs this year.
Freddie Mac intends to issue its second deal towards the end
of the year, and both GSEs have ambitious plans for the product
and hope to become programmatic issuers by next year. The aim is
to transform the STACR bonds into a consistent, broadly
distributed, liquid credit product.
"In a way, it's good that the Fannie and Freddie deals are
so similar in structure, because if they're almost fungible,
they will be more successful as a consistent, recurring
product," said another MBS investor.
The Freddie Mac deal was popular with investors, as it
presented a rare opportunity for bond investors to tap into US
residential-mortgage credit as the housing recovery is on an
upswing, while also offering a better yield than similar risk
Investors have had very few avenues of access to US mortgage
credit post-crisis, as the new-issue private-label RMBS market
all but disappeared, and is only now starting to make a
The Freddie Mac STACR deal was upsized at pricing to US$500m
from US$400m due to increased investor demand. The transaction
also has performed well in secondary-market trading since it was
originally issued in July.
Spreads on the US$250m M-1 class, which priced at one-month
Libor plus 340bp back in July, have now tightened in to Libor
plus 291bp in secondary trading as of this past Tuesday,
indicating a strong demand on the part of investors to own the