Freddie Mac announced that it’s contemplating making a change to the structure of its Structured Agency Credit Risk (STACR) transactions in order to try and gain more investors.
The proposed enhancement would enable the company to structure future STACR offerings as notes issued by a trust in an arrangement that qualifies as a Real Estate Mortgage Investment Conduit (REMIC).
The government-sponsored enterprise explained that the change is particularly intended to make the program more attractive to Real Estate Investment Trust (REIT) investors. A fact sheet on the announcement can be found here.
Freddie Mac stated it would facilitate the change by making a REMIC tax election on a majority of single-family loans that it acquires.
“From our preliminary analysis, which we’ve laid out in an accompanying fact sheet, we believe the potential enhancement to STACR would not disrupt the To Be Announced (TBA) market,” said Mark Hanson, senior vice president of securitization with Freddie Mac. “We’ll be validating this conclusion with market participants.”
Fannie Mae announced a similar proposal to explore the idea of a new structure to its benchmark Connecticut Avenue Securities credit risk transfer program to potentially help draw in more REIT investors.
Fannie Mae also noted that it published the announcement in order to be sure that it is avoiding any disruption of the To-Be-Announced (TBA) Mortgage Backed Security (MBS) market.
A Federal Housing Finance Agency spokesperson added, “FHFA continues to encourage Fannie Mae and Freddie Mac to explore different credit risk transfer structures and ways to expand the investor base. Therefore, we are pleased that Fannie Mae and Freddie Mac are going to explore an innovation to their credit risk transfer programs involving credit linked notes and that they will engage with stakeholders and gather feedback about this approach.”
“FHFA continues to monitor this closely to make sure it is consistent with our CRT principles to ensure an efficient To Be Announced market and attract a diversified and broad investor base. We want to fully understand the implications before any action is taken,” the spokesperson stated.
REMICs are not new to the market. There was a lot of controversy surrounding REMICs after the financial crisis but they have since gone out of the market. This article on Re-REMICs in The Atlantic by Daniel Indiviglio explains the fears some have about the legacy product.
However, Freddie Mac's offer is markedly different from the Re-REMICs from 2009.