Freddie Mac will look to get future risk-sharing deals rated
Freddie came to market first, but Fannie launched to more investors
In a effort to reform Fannie Mae and Freddie Mac and both's dominant role in the mortgage markets, a panel at the ABS East conference focused on innovations at the government-sponsored enterprises that seek to move more money into the private market.
One such tool that seems to be helping to accomplish this goal, and largely praised by panelists, is the launch of the risk-sharing deals from Fannie and Freddie.
Freddie came to market with a risk-sharing deal, thereby shifting some of the product into the private market. And then came Fannie, which was able to get the deal rated. Now Freddie said it will likely do the same and neither GSE said it is going to stop there, in terms of new, innovative market product offerings.
This ratings distinction is important and it shows a broad market for credit risk, said Gyan Sinha, a portfolio manger at KLS Diversified Asset Management to a jam-packed breakout session. And Laurel Davis, vice president at Fannie Mae, added the ratings gave the opportunity for the GSE to show it is effective at managing credit risks.
"Having a rating does open a different investor base," said Davis. "That was in response to the market."
"We would have preferred to have our first deal rated," said Michael Reynolds, a credit risk structuring consultant for Freddie Mae and architect of the risk-sharing deal. Reynolds added that they simply ran out of time to get a rating before issuance.
"I fully expect our future transactions to be rated by NRSO entities," he added.
The two GSE panelists said there are more ideas in the works to help shift more of the risk over to private players. Lender risk sharing has some potential, but the GSE should think more about counter-party risk before moving foreword with an offering, the two panelist agreed. But the ideas have merit.
"Let's have lenders come back and take some of that risk," Reynolds said.
Laurie Goodman, the new director of Housing Finance Policy at the Urban Institute, provided some balance to the comments and said conservatorship status is compressing pricing at the GSEs. However, the move away from government oversight and back into the private-label market is going to happen at a very gradual rate. Until then, these products will continue to be offered at commodity-pool rate, thereby undermining the full potential of these new structured finance products.