Freddie Mac (FMCC:US), which has sold $3.1 billion of securities sharing the risk it bears from homeowner defaults, will seek to sell debt tied to potentially riskier mortgages, according to a company executive.
The government-controlled company’s four offerings of risk-sharing notes have all been linked to homeowners who took out mortgages equal to between 60 percent and 80 percent of their property values. The McLean, Virginia-based company is now exploring similar deals that would include debt with higher loan-to-value ratios of as much as 90 percent, said Mike Reynolds, a director of portfolio management.
“Before the end of the year we want to expand the risk program to cover other collateral,” he said today in a telephone interview.
The risk-sharing bonds that Freddie Mac and competitor Fannie Mae started offering in 2013 resemble a new model for the $9.4 trillion home-mortgage market envisioned by legislation introduced last month by the leaders of the Senate Banking Committee. The bill would replace the firms -- which the U.S. seized in 2008 and now back about 60 percent of new home loans - - with a government mortgage-bond insurer that would bear losses after private capital absorbs the first 10 percent.
The company today sold $966 million of risk-sharing bonds that are tied to about $28.5 billion of home loans originated in 2013 and placed into securities Freddie Mac guarantees. The notes would lose principal if enough of those mortgages default.
Freddie Mac issued $230 million of the bonds to pay 85 basis points more than a borrowing benchmark, the company said. The debt is ranked A by Fitch Ratings and Kroll Bond Rating Agency. The firm sold similar debt on Feb. 6 at a spread of 100 basis points, or 1 percentage point, more than the one-month London interbank offered rate.
Investors’ growing comfort with the transactions’ structures and trading helped it sell bonds in the latest deal at “much tighter spreads than the previous one,” Reynolds said. More than 75 investors participated in the latest deal, compared with more than 65 in the last one, Freddie Mac said.
Freddie Mac has also started shedding risk through new types of transactions with reinsurers and brought in “several representatives” from such guarantors yesterday to learn more about its business, it said in an e-mailed statement.
Prices of existing risk-sharing bonds have soared amid a housing recovery, tighter loan standards and demand for securities with higher yields. Issuance is growing as policy makers seek to reduce their role in the market and assess whether the companies are charging enough to guarantee their traditional home-loan bonds before a broader market overhaul.
The company plans to issue the bonds quarterly, depending on the market, so its next deal probably won’t come until after June, Reynolds said. It’s considering selling bonds tied to loans with higher LTVs at the same times as additional offerings under its current program, he said.
Borrowers with down payments of less than 20 percent, or similar home equity in a refinancing, generally must also buy mortgage insurance from private firms when receiving Fannie Mae and Freddie Mac loans. Exceptions have been made in recent years to help homeowners with loans taken out before the housing crash lower their payments.
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