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Buyers Ready to Invest in Credit Risk Bonds with Freddie Mac

Freddie Mac

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Starting back in July of 2013, Freddie Mac initiated a risk-sharing plan to transfer some amount of their residential mortgages credit-risk exposure from taxpayers. The offering was to attract other sources of capital from the private market, like banks, mutual funds, and insurance companies.

The Structured Agency Credit Worthiness (STACR) debt notes offering has received investment grade ratings from Fitch and Moody’s, and attracted over 50 different investors. Effectively, any investor that bought more than $1 billion in bonds now shares the risk of a portion of losses that could happen if some mortgage borrowers don’t end up repaying their loans.

Freddie Mac is back with another installment (third) of its risk-sharing deals under mortgage credit securitization platform. So far, these credit-risk deals have received an excellent response from the investors and the government enterprise is ready to come up with similar deals in future.

The past few months have witnessed an increase in the investor pool planning to invest in these government bonds. We can expect a regular issuance of similar deals throughout this year and the government plans to increase the credit risk on private investors in small installments.

Key Points of Third Risk-Sharing Deals

  • More than 65 investors are now participating in this offering.
  • Single-A Rated Class Pricing: one-month LIBOR with 100 basis points
  • Triple-B Rated Class Pricing: one-month LIBOR with 220 basis points
  • Unrated Class Pricing: one-month LIBOR with 450 basis points

The most interesting fact is the introduction of three different bonds in the STACR 2014 series with the target to offer additional protection to Freddie Mac and offer healthy combination of products. Freddie Mac anticipates that these product mixtures are among the primary reasons for better response from investors (20+ investors). The earlier offering in 2013 had two different types of product investment options.

The STACR 2014 series has offered better investing flexibility to the investors with an option to exchange between these three classes. It is possible to combine pro-rata components of each of the individual cash flows. At the same time, investors can divest interest from any of these classes and create more bonds with individual margins.

The third installment of risk-sharing deals, STACR 2014, constitutes of 140,000 residential loans with $32.4 Billion in principal balance (unpaid). The 30-year fixed-rate single-family mortgages purchased by Freddie Mac during the second quarter of 2013 are among the subset of this STACR pool.

Transferring Risk good for Taxpayers?

This isn’t the first time Freddie Mac has tried it’s hand at raising capital in the private sector. Over the past 5 years they have been successful at bringing in more than $64 billion dollars through a multi-family K-Deal program. This makes them one of the largest issuers of multifamily structured debt in the US capital markets, putting the overwhelming majority of risk onto the private capital investors that purchase their bonds.

Related: Freddie Mac Housing Report: What’s In-Between the Lines?

What do you think? Is this innovate and forward-thinking of Freddie Mac to transfer the risk off the government and into the private sector? Or is it spelling trouble to not have government more government oversight involved?