Mortgage giant Freddie Mac is nearing completion of its first risk-sharing transaction, a key step in the process of attracting private capital back into the mortgage finance system.
The securities, entitled "Structured Agency Credit Risk" notes, are the first in a series of such offerings, providing the government-sponsored enterprise with an additional means of reducing credit exposure and taxpayer risk.
The enterprise has offered $500 million of derivatives linked to mortgages it holds as well as guarantees.
"This debt issuance is an important step forward in reducing our exposure to residential credit risk by transferring a portion of it to private sector investors," said Freddie Mac CEO Donald H. Layton. "Our intent is to create a product that will be well-received by investors and can become repeatable and scalable over time."
He added, "Due to investor demand, the size of the offering was increased from $400 million to $500 million, and about 50 broadly-diversified investors participated in the offering, including mutual funds, hedge funds, REITS, pension funds, banks, insurance companies and credit unions."
The securities are bonds issued by Freddie Mac to protect against credit risk with the value depending on the performance of a pool of $22.5 billion of residential mortgage-backed securities.
Additionally, the notes are distinctive in that they do not impact the To-Be-Announced market or limit investor uncertainty by utilizing a predefined severity aspect.
"The transaction — a direct debt issuance — will assist Freddie Mac in transferring credit risk to the private sector on recently-acquired, single-family conforming loans," stated Federal Housing Finance Agency acting director Ed DeMarco.
He continued, "One of the goals of our Scorecard and Strategic Plan for Enterprise Conservatorships is to gradually contract Fannie Mae and Freddie Mac’s dominant presence in the marketplace. This transaction is a step towards that goal."
Freddie Mac is reducing its risk exposure to unexpected losses by placing the securities with investors. However, the enterprise will retain control of the servicing of the loans in the pool, allowing the loans to follow the GSE’s loss mitigation practices and programs.
Co-lead manager and sole bookrunner Credit Suisse (CS) as well as co-lead manager Barclays Capital (BCS) offered the notes to the market.
"Treasury believes these efforts are an important step to increasing private sector participation in the housing finance sector," said Treasury counselor to the secretary for Housing Finance Policy Michael Stegman.
He concluded, "This tool helps protect the interests of the American taxpayer, with private capital taking the predominant credit loss – aligning with the Administration’s goal of reducing the government’s footprint in the mortgage market."