Fannie Mae Prices First Capital Markets Risk-Sharing Transaction

""Fannie Mae"":http://www.fanniemae.com has priced its first ""risk-sharing transaction"":http://www.fanniemae.com/portal/funding-the-market/credit-risk/index.html under the Connecticut Avenue Securities series (C-deals).

The $675 million note offering is scheduled to settle on October 24 and is similar in structure to the $500 million offering of Structured Agency Credit Risk (STACR) securities offered by Freddie Mac this summer. That alignment was ""definitely by design,"" according to Fannie Mae VP Laurel Davis.

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Like Freddie’s, Fannie Mae's C-deal is intended to attract private capital to the housing market and reduce taxpayer risk.

In a conference call with reporters Wednesday, Davis explained that based on investors’ feedback following Freddie Mac’s offering, Fannie provided ratings on its C-deal securities in order to attract a wider scope of secondary market traders. Some 80 investors participated in the pricing of Fannie Mae’s offering, including hedge funds, insurers, asset managers, real estate investment trusts (REITs), and credit unions.

“FHFA is pleased that Fannie Mae is nearing completion of another risk-sharing transactionâ€"the first Connecticut Avenue Securities or “C-deal” transaction,” said Edward DeMarco, Federal Housing Finance Agency (FHFA) director. “The C-deal series will be direct debt transactions in which Fannie Mae issues bonds to investors, allowing private capital to assume a portion of the mortgage credit risk taken on by Fannie Mae.”

With the C-deal notes, the amount of periodic principal and ultimate principal paid by Fannie Mae is determined by the performance of a large and diverse reference pool of more than 112,000 single-family mortgage loans with an outstanding unpaid principal balance of $27 billion.

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This reference pool consists of a random selection of eligible loans acquired in the third quarter of 2012, underwritten using strong credit standards and enhanced risk controls, the GSE explained. The loans included in the first C-deal transaction are fixed-rate, generally 30-year term, fully amortizing mortgages with loan-to-value ratios (LTVs) between 60 percent and 80 percent.

C-deal notes are different than other Fannie Mae securities and debt issuances in that when Fannie issues fully guaranteed single-family mortgage-backed securities (MBS), it retains all of the default risk and losses associated with the underlying loans in exchange for a guaranty fee. With risk-sharing securities, Fannie transfers some of the retained credit risk to investors in exchange for sharing a portion of the guaranty fee payments.

The GSE notes that investors in C-deals may experience a full or partial loss of their initial principal investment, depending upon the credit performance of the mortgage loans in the related reference pool.

Last week, ""Fannie Mae finalized an agreement"":http://dsnews.comarticles/fannie-mae-implements-major-strategic-objective-2013-10-10 with National Mortgage Insurance Corporation (National MI) on a deal to provide credit risk coverage on more than $5 billion in single-family mortgages. This arrangement, too, is a vehicle for transferring credit risk away from Fannie and from taxpayers in support of a more private, more sustainable housing finance system.

“The C-deal, and the mortgage insurance pool policy transaction that Fannie Mae completed last week, support FHFA’s 2013 Conservatorship Scorecard and FHFA’s Strategic Plan for the Enterprise Conservatorships. These transactions demonstrate different structures for transferring credit risk to investors thereby facilitating Fannie Mae’s reduced footprint in the marketplace and ultimately protecting taxpayers,” DeMarco commented.

Bank of America Merrill Lynch was the lead structuring manager and joint bookrunner on Fannie Mae's inaugural C-deal and acted as advisor to Fannie Mae on the ""development of the program"":http://www.fanniemae.com/portal/funding-the-market/credit-risk/index.html. Credit Suisse was the co-lead manager and joint bookrunner. Co-managers included Barclays, Morgan Stanley, and RBS, and CastleOak Securities participated as a selling group member.