$FMCC
Freddie Mac Tees Up New Security
Debt Would Enable Investors to Shoulder More Default Risk
Mortgage -finance company Freddie Mac FMCC -4.17% is selling a new type of mortgage bond, testing a part of the U.S. government's plan to wean it off taxpayer support.
The government-controlled mortgage company is selling a $400 million offering of securities called "Structured Agency Credit Risk," according to an offering document reviewed by The Wall Street Journal. The securities are derivatives that are linked to a $22.8 billion pool of residential-mortgage loans owned or guaranteed by Freddie Mac.
The sale, scheduled to close on July 24, would be the fruits of two years of work by Freddie Mac and government officials to create a new type of debt that allows investors to shoulder more of the risk of the trillions of dollars of loans Freddie holds and guarantees.
Federal regulators have pushed for such a solution after the government rescued Freddie and Fannie Mae FNMA -4.58% at the height of the financial crisis in 2008. The Treasury Department and the Federal Housing Finance Agency have both said that Fannie Mae and Freddie Mac ultimately should be wound down, but policy makers haven't decided what, if anything, should take their places.
Freddie and Fannie buy loans and package them into bonds with a guarantee that investors won't suffer losses when borrowers default. Both companies lost huge amounts of money during the housing bust, and the Treasury Department pumped $188 billion into the companies to keep them afloat.
"Our intention is to create products that will be well received by investors" and can be sold in greater volume over time, said Patti Boerger, a Freddie Mac spokeswoman. Fannie Mae is "working with FHFA to meet the goals" for transactions that share mortgage risk with investors, spokesman Andrew Wilson said.
The new securities help Freddie Mac raise money for its business over and above its usual offerings of bonds filled with loans it guarantees. The debt also helps cushion Freddie Mac against potential losses on the $22.8 billion of loans tied to the derivatives.
Freddie Mac met likely buyers over the course of several months to get the debt off the ground, as many investors still bristle at mortgage bonds not backed by the government, according to people who have met with Freddie Mac.
The deal also comes at a rocky time for bond markets, which have reeled at the prospect of reduced support from the Federal Reserve .
"This deal is necessarily going to have to have a lot of bells and whistles that are more investor friendly," said Greg Reiter, head of residential mortgage research at Wells Fargo Securities and a former vice president in Freddie Mac's securitization group.
Freddie Mac agreed to absorb early losses on the debt by holding securities referencing 0.3%, or $68.5 million, of the loan pool, according to the offering document. That keeps Freddie Mac aligned with investors, some of whom pushed for conditions they contended would keep the firm vigilant about the quality of its loans.
The deal also gives investors a clear picture of what losses they might take when loans become delinquent, something investors want in the wake of the housing bust and reduces the yields Freddie Mac will have to pay.
There could be limits to Freddie Mac's ability to raise money with these securities. The transaction likely would lock out buyers that are prohibited from buying derivatives, potentially including some large institutions and mutual funds .
Fannie Mae is planning an alternative structure using mortgage insurance for its own "risk sharing" deal later this year, according to a person familiar with the matter.
It isn't clear whether Freddie's new debt security will be successful given the recent volatility across bond markets. Issuance of securities backed by nongovernment loans has increased this year. Many sellers had to raise yields as interest rates have shot up since early May, even though the mortgage loans backing the deals were seen as high quality.
—Nick Timiraos contributed to this article.
Freddie Mac Tees Up New Security
Debt Would Enable Investors to Shoulder More Default Risk
Mortgage -finance company Freddie Mac FMCC -4.17% is selling a new type of mortgage bond, testing a part of the U.S. government's plan to wean it off taxpayer support.
The government-controlled mortgage company is selling a $400 million offering of securities called "Structured Agency Credit Risk," according to an offering document reviewed by The Wall Street Journal. The securities are derivatives that are linked to a $22.8 billion pool of residential-mortgage loans owned or guaranteed by Freddie Mac.
The sale, scheduled to close on July 24, would be the fruits of two years of work by Freddie Mac and government officials to create a new type of debt that allows investors to shoulder more of the risk of the trillions of dollars of loans Freddie holds and guarantees.
Federal regulators have pushed for such a solution after the government rescued Freddie and Fannie Mae FNMA -4.58% at the height of the financial crisis in 2008. The Treasury Department and the Federal Housing Finance Agency have both said that Fannie Mae and Freddie Mac ultimately should be wound down, but policy makers haven't decided what, if anything, should take their places.
Freddie and Fannie buy loans and package them into bonds with a guarantee that investors won't suffer losses when borrowers default. Both companies lost huge amounts of money during the housing bust, and the Treasury Department pumped $188 billion into the companies to keep them afloat.
"Our intention is to create products that will be well received by investors" and can be sold in greater volume over time, said Patti Boerger, a Freddie Mac spokeswoman. Fannie Mae is "working with FHFA to meet the goals" for transactions that share mortgage risk with investors, spokesman Andrew Wilson said.
The new securities help Freddie Mac raise money for its business over and above its usual offerings of bonds filled with loans it guarantees. The debt also helps cushion Freddie Mac against potential losses on the $22.8 billion of loans tied to the derivatives.
Freddie Mac met likely buyers over the course of several months to get the debt off the ground, as many investors still bristle at mortgage bonds not backed by the government, according to people who have met with Freddie Mac.
The deal also comes at a rocky time for bond markets, which have reeled at the prospect of reduced support from the Federal Reserve .
"This deal is necessarily going to have to have a lot of bells and whistles that are more investor friendly," said Greg Reiter, head of residential mortgage research at Wells Fargo Securities and a former vice president in Freddie Mac's securitization group.
Freddie Mac agreed to absorb early losses on the debt by holding securities referencing 0.3%, or $68.5 million, of the loan pool, according to the offering document. That keeps Freddie Mac aligned with investors, some of whom pushed for conditions they contended would keep the firm vigilant about the quality of its loans.
The deal also gives investors a clear picture of what losses they might take when loans become delinquent, something investors want in the wake of the housing bust and reduces the yields Freddie Mac will have to pay.
There could be limits to Freddie Mac's ability to raise money with these securities. The transaction likely would lock out buyers that are prohibited from buying derivatives, potentially including some large institutions and mutual funds .
Fannie Mae is planning an alternative structure using mortgage insurance for its own "risk sharing" deal later this year, according to a person familiar with the matter.
It isn't clear whether Freddie's new debt security will be successful given the recent volatility across bond markets. Issuance of securities backed by nongovernment loans has increased this year. Many sellers had to raise yields as interest rates have shot up since early May, even though the mortgage loans backing the deals were seen as high quality.
—Nick Timiraos contributed to this article.
