Freddie Mac to sell first-loss position in new risk-sharing deal

Announces new STACR program features

Freddie Mac is planning to bring its second credit risk-sharing offering of 2015 to market soon, but this new offering will be unlike any of the other risk-sharing deals Freddie has offered up so far. The deal will give investors something that they’ve been unable to get their hands on until now — the first-loss position.

The government-sponsored enterprise announced Tuesday that it is prepping its first Structured Agency Credit Risk transaction of 2015, STACR 2015 DN-1, which offers debt notes offering of $775 million, pending market conditions, Freddie said in a release.

Freddie also announced that the STACR program 2015 features “program enhancements such as transferring a portion of the first loss STACR credit risk tranche to the private capital markets,” Freddie said, adding that the enhancements reduce credit risk and promote program liquidity and provide diverse investment options for investors.

"Freddie Mac is shifting its credit risk business strategy from a buy-and-hold company to a buy-and-sell company, so it is natural that we would further reduce our credit risk exposure by selling the first-loss piece," said Mike Reynolds, Freddie Mac vice president of credit risk transfer. "We have heard from numerous investors who have an appetite for more risk and higher yields like those found in the first loss piece."

According to Freddie, the new STACR program offers the follow enhancements:

  • Issuing 100 basis points of first loss
  • The M-3 bonds will be rated for the first time. Only Class M-1 and M-2 bonds were rated in previous transactions

Under the STACR structure, Freddie Mac holds the senior loss risk in the reference pool, and a portion of the risk in the Class M-1, M-2, M-3 and the first loss Class B tranche.

Freddie also announced that with the settlement of STACR 2015 DN-1, it will have offloaded the credit risk on one million single-family mortgage loans since the credit risk-sharing program’s inception.

And Freddie said that it plans to increase its issuance of risk-sharing deals this year. The GSE said that it is planning to offer up six to eight STACR deals in 2015, based on market conditions. That could to lead to an increase in the issuance of risk-sharing deals this year. 

According to a recent report from Fitch Ratings, the GSEs issued their first three risk-sharing deals in 2013 with a total reference pool of $84.7 billion. But in 2014, the GSEs upped the risk-sharing ante significantly, issuing 11 total deals with a total reference pool of $369.7 billion.

The GSEs first began offering the credit risk-sharing deals in 2013, as a means to attract private capital back to the mortgage market, and according to Fitch’s data, that’s just what the GSEs have done — to the tune of $454.4 billion.

Freddie also recently announced that it obtained a number of insurance polices designed to cover much of the remaining credit risk associated with three of its STACR deals from 2014.

These three transactions transfer much of the remaining credit risk associated with three STACR deals executed in 2014, up to a combined maximum limit of approximately $707 million of losses on pools of single-family loans acquired in 2013 and the first quarter of 2014, Freddie said in a release.

The three STACR deals are STACR 2014-DN1, which featured $32.44 billon in unpaid principal balance; STACR 2014-DN2, which featured a $28.1 billion reference pool of 116,677 mortgages; and STACR 2013-DN2, which boasted a reference pool of more than 145,500 mortgages with an outstanding principal balance of $35.3 billion.

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