Fannie Mae Sells $750 Million of Risk-Sharing Securities
Fannie Mae, the largest source of money for U.S. mortgages, sold $750 million of securities in its second offering of notes tied to the risk of homeowner defaults.
The sale included $375 million of senior-ranked bonds with grades of Baa2 from Moody's Investors Service and one step lower at BBB- from Fitch Ratings, the Washington-based company said Wednesday in an emailed statement. The rest of the debt isn't rated. The junior notes would lose principal first amid defaults on a pool of about $29 billion of loans, Fitch said in a pre-sale report on the deal.
Issuance of risk-sharing securities by government-controlled Fannie Mae and Freddie Mac will jump this year as policy makers seek to reduce their role in the market and assess whether they're charging enough to guarantee traditional home-loan bonds, according to analysts from Bank of America to Barclays, which jointly managed Wednesday's sale. The deals totaled $1.8 billion as they started in 2013. Fannie Mae's are known as Connecticut Avenue Securities, or C-deals.
"We've learned that the market has an appetite for consistency and we plan to respond by bringing regular C-deals to the market this year," Laurel Davis, vice president for credit risk transfer at Fannie Mae, said in the statement.
Legislation introduced last year would overhaul the $9.4 trillion U.S. mortgage-finance system by replacing the companies with a government-owned bond reinsurer that similarly shares risk with private investors. The bill, by Senators Bob Corker, a Republican from Tennessee, and Democrat Mark Warner of Virginia, was praised by President Barack Obama. Leaders of the Senate Banking Committee are now working to craft a bill based on that proposal, with help from the White House.
Fannie Mae completed its inaugural offering by selling $675 million of bonds in October. About 50 investors bought the latest securities, including mutual funds, pension funds, insurers, banks and real-estate investment trusts, according to the company's statement.
The senior notes in today's deal sold at a yield that floats at 160 basis points more than the one-month London interbank offered rate, according to Fannie Mae. That compares with a spread of 200 basis points for similar bonds in the prior sale. The junior debt placed today offers a spread of 440 basis points, versus 525 in the October offering.
The senior bonds carry projected average lives of 2.16 years, compared with 8.17 years for the other securities, according to a person with knowledge of the offering, who asked not to be identified without authorization to speak publicly. A basis point is 0.01 percentage point. Libor, a borrowing benchmark, was set today at 0.16 percent.
In their 2014 outlooks, Bank of America analysts projected $6 billion of issuance of risk-sharing bonds, as Barclays forecast $5 billion to $10 billion and Credit Suisse Group AG expected $6 billion. Fannie Mae and Freddie Mac also turned to new types of insurance policies last year as part of the effort.