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What is the Future of Freddie Mac’s Risk Transfer Policy?

Freddie Mac BHAs Freddie Mac announces its intent to sell its eighth and final scheduled offering [1] this year of Structured Agency Credit Risk (STACR) debt notes, pending market conditions, DS News takes a look back at the STACR offerings as well as what is in store for 2017.

The GSE states that it has led the market in introducing new credit risk-sharing initiatives with STACR, Agency Credit Insurance Structure (ACIS) and Whole Loan Securities (WLS(SM)), and was the first agency to market these types of credit risk transfer transactions. The company has since grown its investor base to more than 200 unique investors, including insurers and reinsurers. Since 2013, the company has transferred a significant portion of credit risk on nearly $570 billion of UPB on single-family mortgages.

“The STACR offering is a part of a broader effort on behalf of Freddie Mac to transfer credit risk from Freddie Mac to private investors,” says Mike Reynolds, VP of Credit Risk Transfer for Freddie Mac.

STACR debt notes are unsecured and unguaranteed bonds issued by Freddie Mac whose principal payments are determined by the delinquency and principal payment experience on a STACR Reference Pool consisting of recently acquired single family mortgages from a specified period. Freddie Mac transfers credit risk from the mortgages in the Reference Pool to credit investors who invest in the STACR debt notes.

“We have a range of goals that we're trying to achieve,” says Reynolds. “First and foremost, we're looking to transfer credit risk into the hands of private capital. Second, we're looking to establish a broad and deep investor base to be able to sustain this credit risk transfer today and into the future. Then third, we're looking to minimize disruptions to the current origination and, specifically, the TBA market.”

In this final STACR offering, Citigroup Global Markets and Barclays Capital will serve as co-lead managers and joint bookrunners.

Additionally, the GSE reports that with the STACR 2016-HQA4 offering of loans with LTVs ranging from 80 to 97 percent, Freddie Mac holds the senior loss risk in the capital structure and a portion of the risk in the Class M-1, M-2 and M-3 tranches, and the first loss Class B tranche.

With regard to what the future of the STACR offerings holds, Reynolds states that Freddie Mac expects to see the same as what has been seen in 2016.

“There's a focus on getting credit protection on new originations (30-year fixed rate, 60 to 97 LTVs),” says Reynolds. “We expect to be credit protecting the same types of collateral with roughly the same volumes next year.”