Fannie Mae has priced a $1.15 billion credit-risk sharing transaction through its Connecticut Avenue Securities series.

The bonds issued through the CAS series are linked to the credit performance of a pool of reference loans that the government-sponsored enterprise has underwritten. This is the third GSE risk-sharing bond issuance that Fannie Mae has issued this year, and also the fourth that exposes investors to actual losses — rather than estimated losses — of the underlying single-family mortgages.

Fannie Mae, in a release, stated it was "pleased" with the investor interest in the six tranches of notes, which saw spreads as tight as 200 basis points above Libor for mortgages with loan-to-value ratios below 80%. For those above 80%, the spreads were between 530 bps and 1275 bps over Libor.

The 1M-1 and 2M-1 tranches, which had the tightest spreads at 200 and 220 bps over Libor, respectively, will receive expected ratings of BBB- from Fitch Ratings and BBB from Kroll Bond Rating Agency. The 1M-2 tranche with a price of Libor plus 530 bps and the 2M-2 tranche at 590 bps over Libor will have provisional ratings of B (Fitch) and B+ (KBRA). The 1-B and 2-B tranches priced at 1175 and 1275 bps over Libor are unrated.

The CAS series, which has 12 issues since 2013, is a means for Fannie Mae to offload a portion of the risk of its loan guarantees on to private capital. Fannie Mae said it plans for the next issue in July and the company "expects to be a regular issuer throughout 2016, subject to ongoing market conditions."

Barclays Capital was lead structuring manager and joint bookrunner with Credit Suisse, which acted as co-lead manager. Co-managers on the deal were BNP Paribas, Bank of America Merrill Lynch, Citigroup and JPMorgan.

In Series 2016-C03, the reference pool is divided into two groups — unlike the previous Series 2016-C-2 in March which departed from the dual-group structure to offer only a single reference pool. One group in Series 2016-C0-3 consists of 49,000 single-family mortgage loans with LTVs between 60%-80% that were acquired in June 2015, with an unpaid principal balance of $11.9 billion. The second group is over 110,000 loans acquired between March and June 2015 with between 80%-97% LTV that carry a collected principal balance of $25.4 billion.

The loans in both groups are fixed-rate, generally 30-year fully amortizing mortgages with underlying average homeowner credit scores of 751 for Group 1 and 746 for Group 2.

As in 2016-CO2, the leading originators in the pool are Wells Fargo, Quicken Loans and Flagstar Bank.

The inclusion of actual losses on to investors is rated as a potential added risk to investors, despite the fact historical data released by Fannie Mae shows actual losses have the potential to be lower than the predetermined estimated losses.

Another potential risk, as explored by Moody's Investors Service last week, was the potential exposure of lender disclosure violations in the origination stage of mortgages backed by Fannie and fellow GSE Freddie Mac.

The disclosure requirements put in force by the Consumer Financial Protection Bureau last fall — known as the TILA/RESPA integrated disclosure rules — has created difficult compliance hurdles for lenders, resulting in unprecedented loan rejection levels in the private-label mortgage bond business.

Moody's has now warned the contagion could spread to the federally backed market, as well. The Federal Housing Finance Agency, the regulator overseeing Fannie and Freddie, are being directed to abstain from loan-level reviews for TRID compliance during the transition phase of mortgages onto the GSE's books.

A TRID violation could expose investors to borrower claims through increased loss severity on the bonds.


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