Freddie Mac is marketing its second risk sharing deal of 2014, and it has received ratings from both Kroll Bond Rating Agency and Fitch Ratings.
Kroll assigned preliminary ratings to seven classes of notes from Freddie Mac Structured Agency Credit Risk STACR 2014-DN2, a securitization providing credit protection against a $28.1 billion reference pool of 116,677 mortgages.
Fitch believes the reference pool is diverse and composed of high-quality prime collateral. The pool is approximately six months seasoned with clean payment histories since acquisition. Compared to historical Freddie Mac vintages, the pool has similar attributes to 2009 to 2011 vintages.
These newer debt issuance deals from the government-sponsored enterprise are notable because of regulatory changes that came as a result of Dodd-Frank that pushed private label capital out of the space. Freddie Mac’s goal is that future deals will look the same between the debt and credit-linked notes as the STACR bonds, but it will take a more traditional structure
STACR 2014-DN2 is the second transaction of this kind issued by Freddie Mac this year, and the fourth since 2013.
The reference pool has a weighted average FICO of 760, a weighted average loan-to-value of 75% and a weighted average combined loan-to-value of 76%.
“The reference obligations are all fully documented prime quality loans, as evidenced by the weighted average FICO of 760, which is well above Freddie Mac’s historical pre-crisis average and in line with recent prime jumbo RMBS,” the pre-sale report says. “The WA debt-to-income ratio of 33% is also within the range that Kroll Bond Rating Agency has seen in recent prime jumbo RMBS.”
Specific to the high LTV and CLTV ratios, Kroll said this.
“While the WA first-lien loan-to-value and combined LTV ratios of 75% and 76%, respectively, represent significant borrower equity in the properties and provide a margin of safety against potential home price declines, these are higher than any of the recent vintage non-agency RMBS transactions that KBRA has rated,” the report says.
Both Fitch and Kroll consider the mortgage loans in the deal to be high quality, prime collateral.
Kroll praised of the performance of the previous three Freddie deals in citing this one.
“Through February 2014, the first STACR transaction was still performing well with few delinquencies. Fromthe few delinquencies that are showing, the significance of borrower characteristics such as FICO and DTIbecomes evident. The average FICO of the delinquent loans is 40 points below that of the performingones, and over 30% of the delinquent loans had original FICOs below 700. First time homebuyers wereslightly but not significantly more likely to be delinquent while delinquent and seriously delinquent loanswere much less likely to have multiple borrowers associated with them,” Kroll pre-sale says.
JPMorgan Chase & Co.(JPM), US Bank (USB) and BB&T (BBT) were the three biggest originators. California based loans make up 20.9% of the geographical concentration, followed by Texas at 5.5% and Illinois at 5.2%.
The full KBRA pre-sale report can be read here.*
The full Fitch pre-sale report can be read here.
Freddie Mac does not make representation and warranties part of the transaction, therefore the government-sponsored enterprise can use its own discretion when reviewing obligations. However, the GSE is aligned enough with investors that Kroll and Fitch do not view this as a material risk.
Another over-hanging concern, one Kroll couldn't decide is decisively positive or negative, is the conservatorship status of the GSEs. While the Federal Housing Finance Agency continues to support Freddie Mac, the STACR deals should be fine. A conversion to receivorship status could put future investor payments at risk, Kroll states.
* Clarification/Correction to source material: A typo in Kroll's report shows the cap structure total in the original presale was totaled incorrectly and listed the total as $840,000,000. It should actually be $966,000,000.