Freddie Mac is preparing a transaction that transfers credit risk on $640 million of super-conforming residential mortgages.

The Freddie Mac Whole Loan Securities Trust, Series 2017-SC01, will issue two tranches of senior securities that are guaranteed but not rated. It will also issue two mezzanine tranches that are not guaranteed, but carry ratings of Baa1 and Ba3 from Moody's Investors Service. The most subordinate tranche, which represents a first-loss position, is unrated.

All of the notes have a legal final maturity of December 2046.

The notes are backed by two pools of mortgages that Freddie Mac acquired from multiple sellers between September and November 2016. Pool 1 consists of 656 fixed-rate loans totaling $341 million with a weighted average mortgage rate of 3.64%. Pool 2 consists of 571 fixed-rate loans totaling $299 million with weighted average mortgage rate of 4.19%.

Freddie Mac acquired the loans from Caliber (65.9%), Wells Fargo (19.1%), Quicken Loans (10%) and Fremont Bank (4.9%).

Borrowers in both pools have high FICO scores and sizeable equity in their properties. The weighted average FICO score for Pool 1 and Pool 2 loans is 760 and 738, respectively. The weighted-average combined loan-to-value ratio for Pool 1 and Pool 2 loans is 72.3% and 77.9%, respectively

However, the pools contain a small number of loans with high principal balances that expose the transaction to the risk of losses at the tail of the transaction, when few loans remain. "At that time, the default of a few large loans could reduce enhancement significantly and result in losses to the subordinate bonds," Moody's states in its presale report.

Super-conforming loans are only available to borrowers only in certain high-cost housing markets. They are eligible for the to-be-announced market, but Freddie does not always deliver them into TBA loan pools. Since 2015, it has been securitizing them in whole loan transactions that allow it to transfer credit risk at the time of issuance, rather than in separate risk sharing transactions.

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