Freddie Mac is planning to sell $966 million of bonds tied to the risk of homeowner defaults after investors that bought in earlier sales reaped gains, according to a person with knowledge of the transaction.
The government-controlled mortgage firm’s offering next week may include $230 million of debt set to receive A credit grades from Fitch Ratings and Kroll Bond Rating Agency, as well as $391 million of riskier unrated notes, said the person, who asked not be named because the information wasn’t public.
The risk-sharing bonds sold since Freddie Mac (FMCC:US) and rival Fannie Mae started offering the debt last year have soared amid a housing recovery, tightened loan standards and demand for securities offering higher yields. All three parts of a $1 billion Freddie Mac deal on Feb. 6 have gained, with the most-junior portion rising yesterday to almost 106 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Last week, the “transactions continued to benefit from the increased presence of real money accounts adding positions in the sectors, particularly lower in the capital structure,” Bank of America Corp. analysts Chris Flanagan, Ryan Asato and Justin Borst wrote in a March 21 report.
Real-money investors include mutual funds and insurers, in contrast to so-called fast-money buyers such as hedge funds. The deals’ capital structure refers to their various portions, which are paid down in a specific order.
Issuance of risk-sharing securities by Freddie Mac and Fannie Mae is accelerating as policy makers seek to reduce their role in the market and assess whether they’re charging enough to guarantee their traditional home-loan bonds. The deals also reflect a potential future model for the more than $9 trillion U.S. mortgage-finance system.
Legislation introduced this month by the leaders of the Senate banking committee would replace Fannie Mae (FNMA:US) and Freddie Mac with government bond insurance that would bear mortgage losses only after private capital absorbs the first 10 percent.
Patti Boerger, a spokeswoman for Mclean, Virginia-based Freddie Mac, said that the company has previously announced it would seek quarterly sales of its risk-sharing securities.
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