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Freddie Mac launching new risk-sharing deal structure: The cash securitization

Offering $300 million of senior and subordinate actual loss securities

Freddie Mac is bringing another mechanism for sharing its credit risk to market – one that hasn’t been seen much since the crisis – a cash securitization.

Freddie Mac announced Thursday a new credit risk-sharing deal structure, the Freddie Mac Whole Loan Security, an offering of approximately $300 million of guaranteed senior and unguaranteed subordinate actual loss securities.

Freddie Mac also announced that the deal priced Thursday, but did not disclose the pricing.

Freddie Mac Whole Loan Securities Trust, Series 2015 SC01, a Freddie Mac trust, will issue approximately $278 million in guaranteed senior certificates and approximately $23 million in unguaranteed subordinate certificates.

According to Freddie Mac, the collateral backing the certificates is 574 fixed-rate super conforming loans originated in the fourth quarter of 2014 and the first quarter of 2015.

Additionally, Freddie said that the loans are eligible for the To Be Announced market, but were not delivered into TBA loan pools.

According to Kevin Palmer, vice president of single-family strategic credit costing and structuring at Freddie Mac, the deal allows Freddie Mac to offload more credit risk than with its Structured Agency Credit Risk series and its Agency Credit Insurance Structure, while also bringing more private capital into the market.

“We led the industry in creating entirely new asset classes to de-concentrate risk across the financial system with STACR and ACIS," Palmer said.

"WLS represents another important capability to transfer credit risk,” Palmer continued. “We believe this offering will be especially attractive to certain private capital participants that prefer a cash securitization."

According to Palmer, cash securitizations were the primary way the industry transferred credit risk in the pre-crisis mortgage market, but the practice has been “nearly dormant” since the crisis.

“We believe the WLS addresses some of the key concerns that investors experienced during the financial crisis, such as ensuring there is an active risk manager like Freddie Mac who can adapt mortgage servicing requirements to meet changing market conditions,” Palmer said.

“We are pleased with the market response to this initial WLS offering,” Palmer said. “We expect to have regular WLS issuances.”

In a release, Freddie Mac said that there are several key features to the deal, which it feels will make it attractive to investors, including:

  • The underlying loans were originated, and will be serviced, in accordance with the Freddie Mac Single Family Seller/Servicer Guide
  • The certificates are backed by newly-originated super-conforming fixed-rate loans that, while eligible, were not delivered into TBA loan pools
  • Senior certificates guaranteed by Freddie Mac as to timely interest and ultimate principal
  • Principal payments on loans are allocated to senior and subordinate certificates on a pro-rata basis, subject to certain collateral performance and credit enhancement tests
  • The senior certificates, other than the interest-only certificates, have fixed coupons
  • The interest-only certificates and subordinate certificates have net weighted average coupons

Credit Suisse is the left lead manager and sole bookrunner. Bank of America Merrill Lynch is co-lead manager; Barclays is co-manager; and CastleOak Securities is a selling group member.

WLS 2015-SC01 is expected to settle later this month, Freddie said.

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