One of the Federal Housing Finance Agency’s priorities for 2013 is to begin to bring private capital back into the mortgage finance system through risk-sharing transactions — one way or another.
Last week, Freddie Mac moved forward toward the conservator’s goal of contracting its risk profile by pricing a $500 million risk-transfer deal linked to mortgages it guarantees. The transaction was upsized from an initial estimate of $400 million.
A rosier housing market and mortgage credit outlook has influenced the private sector appetite for mortgage credit. As a result, the Structured Agency Credit Risk (STACR) notes offering have left agency investors wondering if this pricing will ultimately impact future guarantee-fee hikes.
"Given the relatively small size offered, $500 million, it isn’t clear how much weight the FHFA will assign to one transaction pricing. The next $1 billion, $10 billion, or more will begin to test the market’s enthusiasm for mortgage credit," explained analysts for JPMorgan Chase (JPM).
The collateral behind the enterprise’s offering excluded high loan-to-value collateral and Home Affordable Refinance Program streamline refi loans.
As a result, the government-sponsored enterprises may need separate mechanisms to discover private sector pricing for high loan-to-value collateral, which can be achieved through private mortgage insurance or model-based pricing – charging via upfront loan level pricing adjustments like both currently do, JPMorgan Chase analysts noted.
On a similar note, analysts for Bank of America Merrill Lynch pointed out that the cost of transferring 0.3% to 3% slice of the collateral is roughly 15 basis points, compared to the overall average g-fees of 50 basis points — a significant difference.
"The sale of these notes provides further insights into the risk-based pricing of the agency guarantees and their g-fees," BofAML analysts stated.
They added, "This also helps to start the GSEs on their way to bringing in private capital back into the mortgage market distributing mortgage credit risk away from the GSEs."
Many agency investors are expecting additional g-fee hikes, arguing that the current levels are crowding out private sector participation in the market.
As a result, Freddie Mac’s notes pricing suggest that there’s strong private demand for mortgage credit.
But, the deal does not offer enough clarity on all the necessary g-fee components.
"STACR does not lend immediate support for a g-fee hike which would happen if its implied spreads were above what the GSEs currently charge," JPMorgan Chase analysts said.
"However, away from STACRs, a cost of capital argument could be made that g-fees would need to be higher to encourage private competition," the mega bank analysts concluded.
