Fannie Mae is marketing its second offering of the year of Connecticut Avenue Securities transferring the credit risk on mortgages that it insures.
The Series 2016-C02 is also Fannie Mae's third transaction offering exposure to actual losses on a pool of mortgages, as opposed to estimated losses, according to Moody's Investors Service, which is rating the deal.
Unlike the previous transaction, CAS 2016-C01, which is backed by two reference pools of loans, the notes in CAS 2016-C02 are backed by a single reference pool of loans with loan-to-value ratios between 60.01%-80% that were acquired between March 1 and May 31, 2015. The loans are seasoned by 9.1 months, on average.
By comparison, in the previous transaction there were two series of notes backed by two separate pools of loans, one with LTVs below 80% and with LTVs above 80%.
The credit quality of the reference pool for CAS 2016-C02 is similar to that of the lower LTV pool backing CAS 2016-C01, according to Moody's. There are 146,193 prime, fully amortizing, fixed-rate, one-to-four unit, first-lien conforming loans totaling $36 billion. The weighted average original LTV of the pool is 74.92% and the weighted average FICO is 752.
The loans were originated on or after Oct. 1, 2014 by various originators and acquired by Fannie Mae between March 1 and May 31, 2015. The largest three originators (by loan balance) are Wells Fargo Bank (12.23%), Quicken Loans Inc. (6.21%) and JPMorgan Chase Bank (2.9%).
Fannie Mae is not offloading all of the credit risk of the loans; it will retain at least 66% of the most junior tranches, incurring the first losses, 5% of the mezzanine tranche and 100% of the senior tranches. This aligns the mortgage insurer's interests strongly with those of investors in the deal, according to Moody's. However, the presale report states that Fannie Mae "may have incentives to work out breaches of sellers' loan representations and warranties and servicers' breaches of servicing obligations in ways other than requiring such seller or servicer to repurchase the related mortgage loans," which would not be in the best interest of investors.
Moody's has assigned ratings to four tranches of notes: the $342 million 1M-1 tranche is rated Baa3, the $222.5 million 1M-2A tranche is rated Ba1, the $376.6 million 1M-2B tranche is rated B2 and the $599 million 1M-2 tranche is rated B1.
Bank of America Merrill Lynch and Wells Fargo Securities are the deal's co-lead managers; Barclays Capital, BNP Paribas Securities, JPMorgan Securities and Nomura Securities are co-managers.