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Fannie Mae Woos Investors For Mortgage Risk-Sharing

news.investors.com | September 30, 2013

By Bloomberg News

Fannie Mae (FNMA), preparing its first sale of securities that would share the risks of homeowner defaults with bondholders, will offer better terms than in Freddie Mac's initial deal as the U.S.-backed mortgage companies seek to expand investor participation in the market.

Fannie Mae officials are visiting investors across the country, with stops in Boston and Cincinnati this week, as Fannie Mae attempts to sell $675 million of the debt at lower yields than Freddie Mac (FMCC) got in its $500 million offering in July, said three people with knowledge of the sale who asked not to be named because details are private. Under Fannie Mae's terms, bondholders won't suffer losses until delinquencies are higher.

U.S. regulators see the notes as a way to reduce the dominance of the two government-controlled firms and assess if they're charging enough to guarantee their traditional mortgage bonds, embracing a risk-sharing approach that may play a central role in the future of the $9.3 trillion U.S. mortgage market.

"These are the proverbial baby steps," said Anthony B. Sanders, an economics professor at George Mason University in Fairfax, Va., and former head of mortgage-bond research at Deutsche Bank (DB).

Fannie Mae's sale, planned for next month, reflects U.S. attempts to reduce its role, with the current share of new mortgages financed by taxpayer-backed programs at about 85%. Fannie Mae and Freddie Mac, which were seized by the U.S. five years ago this month amid the worst housing slump since the 1930s, account for about two-thirds of the market.


Housing Legislation

The risk-sharing transactions resemble provisions included in legislation introduced this year by Republican Sen. Bob Corker of Tennessee and Democratic Sen. Mark Warner of Virginia, and endorsed by President Barack Obama. The proposal would create an agency to replace Fannie Mae and Freddie Mac that would bear catastrophic mortgage losses, after private firms take the first 10%.

The Fannie Mae sale comes as bond investors are seeking new supply because banks are increasingly holding onto other mortgages. After 27 non-government bond deals tied to about $12 billion of new mortgages in the first eight months of 2013, no widely marketed sales have been completed in September, according to data compiled by Bloomberg.

Shellpoint Partners, the lender backed by mortgage-bond pioneer Lewis Ranieri, has delayed its second offering, which had been planned for this month, leaving only PennyMac Mortgage Investment Trust (PMT) seeking a sale, according to two people with knowledge of the matter.

The Federal Housing Finance Agency, Fannie Mae and Freddie Mac's regulator, has sought risk-sharing deals among steps meant to shrink the mortgage companies and depend more on private investors as the U.S. Federal Reserve weighs reducing its unprecedented stimulus and the government cuts federal spending.


Government Goals

Andrew Wilson, a spokesman for Washington-based Fannie Mae, declined to comment on the terms of its planned transaction.

"We are working with FHFA to meet the goals of the conservatorship scorecard for 2013," said Wilson, referring to targets guiding Fannie Mae and Freddie Mac executive bonuses that seek risk-sharing on $20 billion of mortgages each.

Bank of America Corp.'s Merrill Lynch unit, which is jointly managing underwriting of the Fannie Mae bonds with Credit Suisse Group (CS), is helping structure the deal. Z ia Ahmed, a spokesman at the bank, declined to comment. The deal also is expected to differ from Freddie Mac's unrated notes by getting a grade of BBB- on a slice from Fitch Ratings, the people said.

Fannie Mae is calling its new bonds Connecticut Avenue Securities, after a street in Washington where one of its offices is located. Freddie Mac named its notes Structured Agency Credit Risk, or STACR, securities, and said it found almost 50 different buyers, including mutual funds, hedge funds, real-estate investment trusts, pension funds, insurers, banks and credit unions.

"The STACR issuance was small relative to the size of Freddie Mac's balance sheet, but we believe it serves as an important step in the transition toward broader private participation in the U.S. mortgage finance market," Fitch analysts Ilya Ivashkov and Bill Warlick wrote last month in a statement.

Freddie Mac officials are now "working on our second STACR transaction and hope to complete it this year and plan to have it rated," Patti Boerger, a spokeswoman, said in an email. "Our goal is to have a programmatic, repeatable and standardized offering with STACR."

The McLean, Va.-based company is "also looking at doing other types of credit risk-sharing transactions this year," she said. In July, Fannie Mae obtained insurance on a pool of about $5 billion of mortgages from National Mortgage Insurance Corp. as part of its risk-sharing effort.

While the Treasury Department joined the FHFA in applauding the Freddie Mac sale as a good first step, Amherst Securities Group LP and Deutsche Bank AG analysts said that the notes might not offer as much protection against homeowner defaults as policymakers seek, based on the deal's structure or the amount of risk shared.


Unsecured Obligations

The Fannie Mae notes will be unsecured obligations of the company rather than traditional mortgage-backed securities, the same as the Freddie Mac offering. The return of their principal will be tied to $28.1 billion of loans made during the third quarter of 2012.

The deal is broken into two parts of $337.5 million each, one of which will pay down before the other as homeowners retire or refinance their debt.

Under the FHFA's direction, Fannie Mae and Freddie Mac are seeking to lower their future risks after returning to profitability after almost $190 billion of taxpayer-funded capital injections. The firms also have been told by the FHFA to try to sell $39 billion of illiquid holdings this year, reduce their total portfolios and increase what they charge to insure new bonds. The FHFA also is weighing lowering the size of loans they can finance, according to analysts at Barclays.

Banks including Wells Fargo (WFC) have been squeezing bond issuers out of the jumbo market by offering the loans at rates lower than available on traditional mortgages. The San Francisco-based lender has said it also has retained more than $20 billion of loans since mid-2012 that could have been packaged into Fannie Mae and Freddie Mac bonds.

Fannie Mae and Freddie Mac may not want to do too well at luring bond investors to their risk-sharing deals, according to Sanders.

"I think that they're nervous about succeeding, because if they succeed that gives a lot of people in Congress the ability to say, 'Well, we don't need them after all do we?'" he said.

Back to September 2013 Archive

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