Fannie Mae sold $1.6 billion of risk-sharing debt to investors who today accepted the same yields on securities that wager on the default rates of riskier mortgages as on bonds tied to safer loans.

The government-backed mortgage giant agreed to pay a floating rate of 2.6 percentage points more than a borrowing benchmark on both $644.5 million of notes tied to homeowners with at least 20% equity in their properties, as well as $225.8 million linked to borrowers with as little as 3%. A pair of senior-ranking bonds each linked to one of the two loan pools will both pay spreads of 0.95 percentage point, the Washington-based company said today in an emailed statement.

Fannie Mae will get less loss relief with some of the bonds. The junior securities linked to riskier loans carry 0.65% of credit enhancement, or protection for investors, compared with 0.3% for those tied to the safer mortgages, according to a report by Fitch Ratings. That means more loans must default before Fannie Mae can reduce the principal owed to bondholders. The bond protection will also be erased at a slower pace on the debt if defaults accelerate.

"What we tried to do was factor in both the higher expected default rates" and that the riskier loans carry separate mortgage insurance usually paid for by borrowers that "we're going to get the benefit of," Laurel Davis, vice president for credit risk transfer at Fannie Mae, said in a telephone interview.

The structural difference means defaults must exceed 3.6% in the first 10 years for the bonds tied to riskier loans to bear losses, compared with 2% for the other debt, Davis said.

The deal represented the first tied to mortgages with higher loan-to-value ratios as Fannie Mae and rival Freddie Mac seek to share more of their losses with investors and insurers to protect taxpayers. Loans with more than 80% LTVs made in 2007 "have experienced approximately 1.5x higher defaults than those with LTVs between 60% and 80%," the focus of earlier risk-sharing deals, Fitch said.

The riskiest type of bonds tied to such safer loans sold in a $966 million deal by Freddie Mac in April offered a spread of 3.6 percentage points more than the one-month London interbank offered rate.

It's a "good time" for the firms to begin selling risk-transfer bonds tied to borrowers with higher loan-to-value ratios because the loans are becoming a bigger share of the market as refinancing drops after a surge in interest rates, leaving a greater proportion of mortgages for home purchases, Davis said.

Bloomberg News