Fitch: Fannie Mae risk-transfer deal more advantageous for mezzanine investors

Still similar to prior risk transfer transactions

Fannie Mae’s seventh risk transfer transaction, Connecticut Avenue Securities, Series 2015-C02, is similar to its prior risk transfer transactions. It does, however, have a distinctive advantage over competing, similar private-label deals.

According to Fitch Rating’s Presale Report, two separate loan groups will be included in CAS 2015-C02.

One loan group will consist of loans with loan-to-value ratios above 60% and up to 80%, and another that consists of loans with LTVs greater than 80% and less than or equal to 97%. The two groups will have identical structures, with the exception of the LS schedule.

Fitch Ratings said it expects to rate the 1M-1 and 2M-1 notes on Fannie Mae’s risk transfer transaction. (The M refers to the mezzanine tranching structure of the deal, that is, the portion of the bonds between investment grade and junk.)

The notes are general senior unsecured obligations of Fannie Mae (AAA/Stable) but are subject to the credit and principal payment risk of a pool of certain residential mortgage loans (reference pool) held in various Fannie Mae-guaranteed MBS.

Due to the structure and counterparty dependence on Fannie Mae, Fitch stated that its ratings on the 1M-1 and 2M-1 notes will be based on the lower of: the quality of the mortgage loan reference pool and credit enhancement available through subordination; or Fannie Mae’s issuer default rating.

"While the transaction structure simulates the behavior and credit risk of traditional RMBS mezzanine and subordinate securities, Fannie Mae will be responsible for making monthly payments of interest and principal to investors," Fitch said in a statement.

According to Fitch, competing private-label mezzanine RMBS often do not receive a full pro-rata share of the pool's unscheduled principal payment until the tenth year.

The Fannie Mae deal will offer a competitive advantage as the M-1 notes can receive a full pro-rata share of unscheduled principal immediately, as long as a minimum credit enhancement level is maintained. Keeping that minimum will most likely not be a challenge for a government-sponsored enterprise.

The notes will be issued as uncapped LIBOR-based floaters and carry a 10-year legal final maturity.

“The objective of the transaction is to transfer credit risk from Fannie Mae to private investors with respect to the $45.01 billion pool of mortgage loans held in previously issued MBS guaranteed by Fannie Mae,” the presale report said.

The previous Connecticut Avenue offerings included reference loans with original loan-to-value ratios of up to 97%.

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