August 02, 2016Fannie Mae Prices Latest Connecticut Avenue Securities Risk Sharing Deal
Reference Pool Loans Have LTVs Over 80 Percent
WASHINGTON, DC – Fannie Mae (FNMA/OTC) has priced its latest credit risk sharing transaction under its Connecticut Avenue Securities™ (CAS) series, a $1.20 billion note offering scheduled to settle on Wednesday, August 10. Through this transaction and other credit risk sharing programs, the company is increasing the role of private capital in the mortgage market and reducing taxpayer risk. After this transaction is completed, Fannie Mae will have brought 14 CAS deals to market since the program began, issued $18.1 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 approximately $621.5 billion pursuant to CAS transactions. After this transaction is completed, Fannie Mae will have transferred a portion of the credit risk on approximately $741.8 billion in single-family mortgages through all of its risk transfer programs.
“This deal follows closely on the heels of our last CAS transaction and we are very pleased with the incredibly strong investor demand we continue to see in the program. So far, we’ve had new investors participating in every CAS transaction we’ve issued,” said Laurel Davis, vice president of credit risk transfer, Fannie Mae. “In addition, we are seeing investors become more comfortable taking credit risk on our loans with a loan-to-value (LTV) ratio greater than 80 percent. We believe this is due to our strong credit and underwriting standards and process, including the use of Collateral Underwriter®, our highly sophisticated proprietary evaluation tool that gives us greater confidence in the underlying property value of the loans that make up the CAS reference pools. We plan to come to market again with our next scheduled issuance window in October, subject to market conditions.”
Loans with LTV ratios over 80 percent have been a longstanding part of Fannie Mae’s guaranty business, and all of these loans are subject to the company’s underwriting and eligibility criteria. The reference pool loans in this deal were acquired with mortgage insurance meeting Fannie Mae requirements. In the event of a default on a reference pool loan, the mortgage insurance proceeds benefit CAS investors and help to reduce the loss severity. In order to insulate CAS investors against counterparty risk exposure to the mortgage insurers, Fannie Mae agrees to cover the full contractual amount of the mortgage insurance, if the mortgage insurer is unable to pay.
Pricing for the 2M-1 tranche was one-month LIBOR plus a spread of 135 basis points. Pricing for the 2M-2 tranche was one-month LIBOR plus a spread of 445 basis points. Pricing for the 2-B tranche was one-month LIBOR plus a spread of 1075 basis points.
The 2M-1 tranche is expected to receive ratings of BBB-sf from Fitch and BBB(sf) from KBRA, Inc. The 2M-2 tranche is expected to receive ratings of Bsf from Fitch and B+(sf) from KBRA, Inc. The 2-B tranche will not be rated. Fannie Mae will retain a portion of the 2M-1, 2M-2, and 2-B tranches in order to align its interests with investors throughout the life of the deal.
J.P. Morgan was the lead structuring manager and joint bookrunner and Wells Fargo Securities was the co-lead manager and joint bookrunner on this transaction. BNP Paribas Securities Corp., Bank of America Merrill Lynch, Barclays Capital Inc., and Citigroup Global Markers Inc. were co-managers. With this transaction, Fannie Mae continues the involvement of Minority, Women, Veteran, and Disabled-Owned Businesses in the CAS program, with both Great Pacific Securities and Loop Capital participating as selling group members.
Fannie Mae continues to issue notes based on 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 significantly enhanced its disclosure 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-C05 consists of more than 169,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $38.7 billion. The loans in this reference pool have loan-to-value ratios between 80 and 97 percent and were acquired from July 2015 through December 2015. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and were underwritten using strong credit standards and enhanced risk controls.
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. To view the periods in 2016 during which Fannie Mae may issue Connecticut Avenue Securities (CAS), please view our 2016 CAS Issuance Calendar.
Statements in this release regarding the company’s future CAS transactions are forward-looking. Actual results may be materially different as a result of market conditions or other factors listed in “Risk Factors” or “Forward-Looking Statements” in the company’s annual report on Form 10-K for the year ended December 31, 2015 and its quarterly report on Form 10-Q for the quarter ended March 31, 2016.