Freddie Mac has another Structured Agency Credit Risk deal in the pipeline—its first for this year and the third ever.
The transaction provides credit protection against a $31 billion reference pool of mortgages, according to Kroll, in its first presale report on a STACR deal.
The reference pool of 139,513 30-year mortgages has a weighted average credit score of 761, a weighted average loan-to-value of 75% and a weighted average combined loan-to-value of 76%. The credit is in line with recent prime residential mortgage-backed securities transactions and the LTVs are higher, according to Kroll.
Wells Fargo is the originator/servicer with the highest concentration of loans in the pool (22%).
The largest geographic concentration of loans is in California (23.4%). This is low compared to the current minimum and average concentration for Kroll-rated mortgage collateral of 37% and 47%, respectively.
Freddie is retaining the risk on five of the tranches referencing the portfolio, and offering three tranches to investors. The tranches Freddie is retaining include one that absorbs the first 30 basis points of loss in the transaction, according to Kroll's report.
Regulators have been working on rulemaking that includes requirements that sellers retain first-loss pieces in the deal. There has been some debate as to whether this should be in the form of horizontal or vertical slices of transactions, given that certain form of this raise concerns for certain asset classes like commercial mortgage-backed securities. (Vertical slices span different classes with different levels of credit protection throughout the capital stack whereas a horizontal slice is in only one part of the capital stack.)
Freddie Mac has both vertical and horizontal alignment in its STACR risk retention, Kroll notes.
Representations and warranties and how much protection they really give investors are another source of debate in the post-crisis mortgage-securities market, and in the STACR transactions they come from sellers of the reference obligations.
However, the sellers must meet Freddie Mac requirements for these. R&Ws related to fraud, compliance with laws and lien priority remain in effect for the life of the loan but there are several R&Ws made by the sellers of the reference obligations potentially sunset in as few as three years, Kroll notes.
Kroll has assigned on a preliminary basis a midrange investment grade rating of Asf to one offered tranche (M-1) based on 3.5% credit enhancement. It has assigned a lower investment grade rating of BBB (sf) to another offered tranche (M-2) based on 2% credit enhancement. It left the third offered tranche (M-3) unrated.
The coupons on the offered tranches will pay an as-yet unspecified coupon above the one-month London interbank offered rate, according to the presale report.
The STACR is one of the initiatives designed to help the agencies share risk with the private sector at the direction of their regulator.