The Federal Housing Finance Agency released its 2015 scorecard for GSEs, raising the risk-transfer target to $150 billion for Fannie Mae and $120 billion for Freddie Mac, up from $90 billion for both in 2014.
Indeed, the mortgage bond market for these risk-sharing deals may actually get even larger. Here's how that can this happen, even with Congressional mandates for the GSE to shrink. Simply put, another part only needs to get smaller.
Accordingly, a client note from Barclays says, $9-10 billion should be the minimum STACR/CAS note offerings in 2015, assuming an issuance slice of ~3% for CAS deals and ~4% for STACR deals, as was the case for recent deals.
“The GSEs far exceeded their risk-sharing targets last year ($420 billion versus the combined target of $180 billion) and this year, too, we expect GSEs to issue more than the scorecard requirement,” analysts say. “Overall, we expect $12-14 billion issuance in GSE credit bonds."
Barclays analyst say that as was the case last year, the scorecard also requires at least one other transaction type in addition to the STACR or CAS structures, for example insurance, upfront credit risk transfers, and senior-sub securitizations.
The target for retained portfolio was unchanged – it must be reduced to $250 billion by end- 2018.
The scorecard does say that “the Enterprises will continue to implement their approved retained portfolio plans;” hence GSEs can be expected to continue selling legacy non-agencies at the current pace.
GSEs non-agency holdings had fallen by 25% in the first three quarters of 2014 and, as of end-Q3, GSEs held $62 billion of legacy non-agency bonds.
“Also, depending on the rundown rate of loans and securities in GSEs’ retained portfolios, they may eventually have to start looking at disposing NPLs to keep the retained portfolio below the cap and attain the $250 billion target by 2018,” Barclays says. “However, given that the retained portfolio size is sufficiently below the cap and that the GSEs have a four-year window to reach $250bn, they can afford to wait and watch before they decide whether to sell their NPL holdings.”