Fannie Mae is planning to follow the lead of its rival, Freddie Mac, and offer securities with exposure to actual losses on the single-family mortgages that it ensures.
So far, the first seven Connecticut Avenue Securities transactions completed by Fannie Mae, including one that priced Tuesday, offer investors exposure to losses based on a calculation of what losses the loans might eventually incur. Freddie Mac completed its first transaction with exposure to actual losses in April; the deal was upsized to $1.01 billion from $720 million originally in response to strong demand.
In a press release announcing the pricing of its latest transaction, Laurel Davis, vice president for credit risk transfer at Fannie Mae, said, "[We] look forward to preparing the market for our transition to an actual loss structure late this year."
In the meantime, Davis said, Fannie Mae is "committed to building liquidity and stability for the CAS program by offering regular, predictable issuance and a consistent deal structure and size."
The $1.45 billion Connecticut Avenue Securities, Series 2015-C02, which transfers the credit risk on $45 billion of single-family mortgage insured by the government-sponsored enterprise, is similar in structure to Fannie Mae's previous deal. The bonds are general obligations of Fannie Mae, but the amount of principal the company pays is determined by the performance of two separate groups of loans, one in which consumers borrowed between 60% and 80% of the purchase price, and one in which consumers borrowed up to 97% of the purchase price.
Pricing for the 1M-1 tranche, rated BBB- by Fitch Ratings and A3 by Moody's Investors Service, was one-month Libor plus a spread of 115 basis points. Pricing for the 1M-2 tranche, which is unrated, was one-month Libor plus a 400 basis points.
Pricing for the 2M-1 tranche, rated BBB-/Baa2, was Libor plus a spread of 120 basis points; pricing for the unrated 2M-2 tranche was Libor plus 400 basis points.
Fannie Mae retained the first loss and senior piece of the structure, as well as a vertical slice of the M1 and M2 tranches in both groups in order to align its interests with investors throughout the life of the deal.
JPMorgan Securities was the lead structuring manager and joint bookrunner and Bank of America Merrill Lynch was the co-lead manager and joint bookrunner on this transaction.