Investments

Freddie MacÕ second high-LTV risk-sharing bond prices tight

$33.43 billion deal carries average LTV of 91.6%

Freddie Mac announced that it has priced its second high loan-to-value ratio credit risk sharing transaction under its Structured Agency Credit Risk platform.

The deal, STACR-HQ2, is the second of the STACR offerings from Freddie to be supported by loans with LTV ratios of between 80% and 95%.

The first high-LTV offering from Freddie, STACR-HQ1, carried an average LTV ratio of 92% and the pool carried a balance of $9.975 billion, spread across 45,112 loans.

STACR-HQ2 was even larger, with an unpaid principal balance of $33.43 billion and a weighted average LTV of 91.6%, spread across 147,771 loans.

Pricing for the STACR Series 2014-HQ2 M-1 class was one-month LIBOR plus a spread of 145 basis points. Pricing for the M-2 class was one month LIBOR plus a spread of 220 basis points. Pricing for the M-3 class was one month LIBOR plus a spread of 375 basis points.

The offering priced tight compared to the first high-LTV ratio from Freddie.

Pricing for the STACR Series 2014-HQ1 M-1 class was one-month LIBOR plus a spread of 165 basis points. Pricing for the M-2 class was one month LIBOR plus a spread of 250 basis points. Pricing for the M-3 class was one month LIBOR plus a spread of 410 basis points.

“We continue to make STACR more appealing to a broader investor base. We listed the STACR bonds on the Global Exchange Market of the Irish Stock Exchange and have preliminary designations of credit quality from the National Association of Insurance Commissioners for all three HQ2 bonds," said Kevin Palmer, vice president of single-family strategic credit costing and structuring for Freddie Mac.

"This offering builds on the STACR platform and shows the flexibility Freddie Mac has as an issuer as we are selling only the HQ Series collateral in this offering for the first time instead of doing it at the same time as our STACR DN Series."

According to Freddie and the presale report from Fitch Ratings, the pool consisted of loans acquired by Freddie in the first three quarters of 2013. Fitch noted that the higher LTV loans are subject to the same underwriting, quality control, and servicing practices as those in the earlier STACR offerings with original LTVs below 80%.

In its presale report, Fitch noted that only 850 of the underlying loans were reviewed by a third-party diligence provider, but that “the results indicated limited findings or were deemed as nonmaterial by Fitch.”

According to Fitch’s data, 53.96% of the loans carry an original collateralized loan-to-value of greater than 90.01%. But despite the high LTV ratio, Fitch cites the borrowers high original credit score as a positive of the deal.

“The collateral pool consists of borrowers with strong credit profiles, demonstrated by the high original WA FICO score of 757,” Fitch said in its report. “Approximately 30.8% of the borrowers have credit scores of 780 or higher. Borrowers with high credit scores generally experience a lower probability of defaulting on their debt.”

According to Freddie, once the STACR 2014-HQ2 transaction settles on or around Sept. 15, the company will have issued $5 billion of STACR debt notes and obtained insurance coverage through ACIS (Agency Credit Insurance Structure) reinsurance transactions of $631 million since they were launched last year.

“Through these credit risk transfer transactions, the company will have laid off a substantial portion of the credit risk on $182 billion UPB in single-family mortgages,” Freddie said.

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