February 11, 2016Fannie Mae Prices Latest Connecticut Avenue Securities Risk Sharing Transaction
WASHINGTON, DC – Fannie Mae (FNMA/OTC) has announced that it priced its latest credit risk sharing transaction under its Connecticut Avenue Securities™ (CAS) series. To promote additional liquidity, Fannie Mae for the first time sought a credit rating for the M2 bonds in a CAS transaction. In addition, the company for the first time is selling a portion of the first loss position, further reducing taxpayer exposure to credit losses.
“Fannie Mae continues to focus on the long term strength and stability of our Connecticut Avenue Securities program,” said Laurel Davis, vice president of credit risk transfer, Fannie Mae. “We continue to work to build a deeper market for credit risk and are pleased with investor participation in the program. We’ve built a robust set of credit risk management tools that benefit Fannie Mae and the investors in our credit risk transfers. Fannie Mae will continue to innovate in the credit risk management space so that we can build a better housing finance system for the future.”
The $945.1 million note offering is scheduled to settle on Thursday, February 18th. After this transaction is completed, Fannie Mae will have completed 10 CAS deals since the program began, issued $13.4 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 more than $467 billion, increasing the role of private capital in the mortgage market and reducing taxpayer risk. Since 2013, Fannie Mae has transferred a portion of the credit risk on more than half a trillion dollars in single-family mortgages through all of its risk transfer programs.
Pricing for the 1M-1 tranche was one-month LIBOR plus a spread of 195 basis points. Pricing for the 2M-1 tranche was one-month LIBOR plus a spread of 210 basis points. Pricing for the 1M-2 tranche was one-month LIBOR plus a spread of 675 basis points. Pricing for the 2M-2 tranche was one-month LIBOR plus a spread of 695 basis points. Pricing for the 1B tranche was one-month LIBOR plus a spread of 1175 basis points.
The 1M-1 tranche is expected to receive ratings of Baa3(sf) from Moody’s and BBB(sf) from KBRA, Inc. The 2M-1 tranche is expected to receive ratings of Baa3(sf) from Moody’s and BBB-(sf) from KBRA, Inc. The 1M-2 tranche is expected to receive ratings of Ba3(sf) from Moody’s and BB-(sf) from KBRA, Inc. The 2M-2 tranche is expected to receive ratings of B1(sf) from Moody’s and B+(sf) from KBRA, Inc. The 1B tranche was not rated. Fannie Mae retained a portion of the M1, M2, and B tranches in group 1 and a portion of the M1 and M2 tranches in group 2 in order to align its interests with investors throughout the life of the deal. The B tranche in group 2 was retained by Fannie Mae.
JP Morgan Securities, LLC was the lead structuring manager and joint bookrunner and Citigroup Inc was the co-lead manager and joint bookrunner on this transaction. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("BofA Merrill"), Barclays Capital, Credit Suisse, and Wells Fargo Securities were co-managers. With this transaction, Fannie Mae continues the involvement of Minority, Women, and Disabled-Owned Businesses in the CAS program, with both CastleOak Securities, L.P. and Loop Capital Markets LLC participating as selling group members.
Beginning in October and continuing with this transaction, Fannie Mae shifted to an actual loss framework for Connecticut Avenue Securities transactions, in which any losses are passed through based on the realized losses of the loans following final disposition. The company enhanced its disclosures data for investors to support this new framework, and published extensive information about its credit risk management practices, with the goal of providing additional transparency.
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 2016-C01 transaction contains over 128,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $30 billion. This reference pool consists of eligible loans acquired from January through February 2015, 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 loan-to-value (LTV) ratio. 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.html.Fannie Mae enables people to buy, refinance, or rent homes.
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