Fannie Mae Prices First Actual Loss Connecticut Avenue Securities Risk Sharing Transaction
Investors Appreciate Company's Comprehensive Approach to Credit Risk Management
WASHINGTON, DC – Fannie Mae (FNMA/OTC) today announced that it priced its latest credit risk sharing transaction under its Connecticut Avenue Securities (CAS) series. This is the company’s first CAS transaction structured using an actual loss framework, which will be the standard for the CAS program going forward. The $1.45 billion note offering is scheduled to settle on October 27. Since the program began, Fannie Mae has completed nine CAS deals, issued $12.44 billion in notes and transferred a portion of the credit risk to private investors on single-family mortgage loans with an outstanding unpaid principal balance of over $437.55 billion, increasing the role of private capital in the mortgage market and reducing taxpayer risk. By the end of 2015, Fannie Mae anticipates it will have transferred a portion of the credit risk on approximately half a trillion dollars in single-family mortgages through all of its risk transfer programs.
“The move to an actual loss structure for CAS places even greater importance on how Fannie Mae manages credit risk, as investors now directly benefit from our comprehensive credit risk management approach,” said Laurel Davis, vice president for credit risk transfer at Fannie Mae. "Because we are actively involved from pre-loan delivery through property disposition, investors have greater confidence in the loans in the CAS reference pools and their opportunity to invest in them. The fact that we are setting strong standards and managing the credit risk of loans throughout the lifecycle has helped investors become comfortable and re-enter the residential credit market. We look forward to another strong year for the CAS program in 2016.”
To date, CAS deals have operated on a fixed severity schedule in calculating write-downs, with credit events occurring generally when reference pool loans become 180 days delinquent. Under the actual loss framework, any losses are passed through based on the realized losses of the loans following final disposition. With the move to the actual loss framework, Fannie Mae has also enhanced its CAS disclosure data for investors and made historical data available to support the transition to the new framework. Fannie Mae will now provide enhanced monthly disclosures to help investors monitor the ongoing performance of their investments in CAS securities. The company also published extensive information about its credit risk management practices, with the goal of providing additional support and transparency ahead of the move to an actual loss framework.
The CAS 2015-C04 transaction included participation from a diversified group of both new and existing investors. Pricing for the 1M-1 tranche was one-month LIBOR plus a spread of 160 basis points. Pricing for the 2M-1 tranche was one-month LIBOR plus a spread of 170 basis points. Pricing for the 1M-2 tranche was one-month LIBOR plus a spread of 570 basis points. Pricing for the 2M-2 tranche was one-month LIBOR plus a spread of 555 basis points.
The 1M-1 tranche is expected to receive ratings of BBB-sf by Fitch Ratings and BBB (sf) by DBRS, Inc. The 2M-1 tranche is expected to receive ratings of BBB-sf by Fitch Ratings and BBB (low) (sf) by DBRS, Inc. The 1M-2 and 2M-2 tranches were not rated. Fannie Mae retained the first loss and senior piece of the structure, as well as a vertical slice of the M1 and M2 tranches in both groups in order to align its interests with investors throughout the life of the deal.
Bank of America Merrill Lynch was the lead structuring manager and joint bookrunner and Barclays Capital was the co-lead manager and joint bookrunner on this transaction. Citigroup, Credit Suisse, and JP Morgan were co-managers. With this transaction, Fannie Mae has further expanded the involvement of Minority, Women, and Disabled-Owned Businesses in the CAS program, with both Drexel Hamilton and Loop Capital, LLC participating as selling group members.
In addition to the flagship CAS program, Fannie Mae continues to reduce risk to taxpayers through its Credit Insurance Risk Transfer (CIRT™) reinsurance program and other forms of risk transfer.
About Connecticut Avenue Securities
CAS notes are bonds issued by Fannie Mae. The amount of periodic principal and ultimate principal paid by Fannie Mae is determined by the performance of a large and diverse reference pool. The reference pool for the Series 2015-C04 transaction contains over 200,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $45.0 billion. This reference pool consists of eligible loans acquired from September through November 2014, and is part of Fannie Mae’s new book of business that was underwritten using strong credit standards and enhanced risk controls. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and the reference pool is subdivided into two loan groups by original LTV. Group one includes loans with original LTV ratios between 60.01 and 80.00 percent. Group two includes loans with original LTV ratios between 80.01 and 97.00 percent.
For more information on this transaction and Fannie Mae’s approach to credit risk transfer, visit https://www.fanniemae.com/portal/funding-the-market/credit-risk/index.htmlFannie Mae enables people to buy, refinance, or rent homes.
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