Fannie Mae Structure Takes Interest Rates Into Account

WASHINGTON, DC-We reported yesterday that Fannie Mae priced its eight multifamily DUS REMIC for the year for a total of $1.09 billion. This particular REMIC was a blend of fixed-rate seasoned collateral and a discount pass-through tranche. GlobeSt.com caught up with Josh Seiff, Fannie Mae Director of Multifamily Capital Markets, to do a deeper dive into the reasoning behind this structure.

Let's begin with the 30,000-foot view: the offering was structured with an eye to accommodating recent rising interest rates. As Seiff puts it, the GSE is tasked with aligning the needs of borrowers and lenders with investor appetite. In this case this means taking into account two sets of collateral: In Group 1, a high-coupon, seasoned group of mortgages that, if sold individually, would trade at high premiums. In Group 2, ten-year DUS loans that are no longer quite as attractive since interest rates have risen--that is, the GSE can no longer strip off the IO-only class.

For the Group 1 securities, Fannie Mae created three different types of securities that are attractive to a broader variety of investors, Seiff explains. "Instead of getting investors to pay, say 110% of the principal, we changed into a fixed rate bond" by structuring a structured into a capped floater and a par pass-through.

Group 2 had the opposite problem. Historically the GSE would strip off the IO, but in the case of these securities, rates have risen significantly since the collateral was purchased, Seiff explains. "Which means there is no IO class to strip off. So we pooled the securities and created a discount pass-through tranche. Here, the idea is to provide investors with collateral diversity, while not stripping the bond down to par."