Fannie Mae will soon Finalize First Risk-Sharing Deal

Fannie Mae appears to be moving quicklyrnto meet the goal of risk sharing set for it by its conservator the FederalrnHousing Finance Agency (FHFA).  Therncompany announced today that it had priced a $675 million note offering, thernfirst in a series of planned Connecticut Avenue Securities (C-deal) offerings.</p

The offering, designated as Seriesrn2013-C01, is scheduled to settle on October 24. rnThese C-deal notes are bonds designed to protect Fannie Mae againstrncredit risk and are part of the company’s strategy to meet FHFA’s Strategic Plan goals for Fannie Mae andrnFreddie Mac (the GSEs).  Under that plan,rnFannie Mae is expected to transfer at least $30 billion of its single-familyrnmortgage risk to private sources of capital. rn</p

This was the second risk-sharing dealrnannounced by Fannie Mae in a week.  On Octoberrn10 it said it had signed an agreement with National Mortgage InsurancernCorporation (National MI) to provide $5 billion in credit risk coverage forrncertain loans acquired by the company in the fourth quarter of 2012 withrnoriginal loan to value (LTV) ratios between 70 and 80 percent.  </p

The loans included in the first C-deal transactionsrnare taken from a reference pool which consists of a random selection ofrneligible loans acquired by Fannie Mae in the third quarter of 2012.  Fannie Mae said these loans are part of therncompany’s new book of business underwritten using strong new credit standardsrnand enhanced risk controls.  The Seriesrn2013-01 offering includes mostly 30-year fixed rate fully amortizing mortgagesrnwith LTV ratios between 60 and 80 percent. </p

C-deal notes are different than other Fannie Mae securities and debtrnissuances.  When Fannie Mae issues fully guaranteed single-family MBS, itrnretains all of the credit (mortgage default) risk associated with losses on thernunderlying mortgage loans and receives a guaranty fee.  With the C-dealrnnotes Fannie Mae transfers some of the retained credit risk to investors inrnexchange for sharing a portion of the guaranty fee.  </p

Pricing for the M-1 tranche was one-month LIBOR plus a spread of 200 basisrnpoints. Pricing for the M-2 tranche was one month LIBOR plus a spread of 525rnbasis points. About 75 broadly-diversified investors participated in thernoffering, including asset managers, mutual funds, pension funds, hedge funds,rninsurance companies, banks, and REITs. Fannie Mae retained the first loss andrnsenior piece of the structure, as well as a vertical slice of the M1 and M2rntranches in order to align its interests with investors throughout the life ofrnthe deal.</p

“We are excited to bring this inaugural deal to the market, and arernencouraged by the broad and diverse investor demand,” said Andrew Bon Salle,rnexecutive vice president for underwriting, pricing and capital markets atrnFannie Mae.  “By sharing risk with investors, Fannie Mae will continue tornprovide much needed liquidity to the market while attracting private capitalrnparticipation in the housing market.  The Connecticut Avenue Securitiesrnprogram was structured so that it does not impact the To Be Announced (TBA)rnmarket, and is scalable and flexible enough to incorporate market feedback intornfuture issuances.”</p

FHFA’s Acting Director Edward J. DeMarco said he was pleased that Fannie Maernwas nearing completion of its first Connecticut Avenue Securities transaction. “ThernC-deal, and the mortgage insurance pool policy transaction that Fannie Maerncompleted last week, support FHFA’s 2013 Conservatorship Scorecard and FHFA’srnStrategic Plan for the Enterprise Conservatorships. These transactionsrndemonstrate different structures for transferring credit risk to investorsrnthereby facilitating Fannie Mae’s reduced footprint in the marketplace andrnultimately protecting investors.”</p

Bank of America Merrill Lynch was the lead manager on the issue and CreditrnSuisse was co-lead manager.  Otherrninvestment houses involved in the transaction were Barclays, Morgan Stanley,rnand RBS, and CastleOak Securities participated as a selling group member.

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