Fannie Mae to roadshow its debut risk-sharing mortgage bond

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 loans.

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 Dosberg.

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 different format.

"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 products.

"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 Commission (CFTC).

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 products.

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 comeback.

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 bonds.