Freddie Mac to Launch First Actual Loss STACR

McLEAN, VA—Freddie Mac is planning to pre-market its first actual loss STACR offering next week in a bid to continue to transfer risk off of its balance sheet – but also in response to market demand.

The actual loss STACR (which stands for Structured Agency Credit Risk) will be similar to recent STACR deals in many ways. The key difference is that, instead of allocating losses to the debt notes based upon a fixed severity approach, losses will be allocated based on the actual losses realized on the related reference obligations. The GSE will sell the first loss and mezzanine tranches, as it does in other STACR deals while retaining a vertical slice of each tranche sold.

 Freddie Mac launched its first STACR deal last year. Essentially the STACR bonds transfers risk to private investors with Freddie Mac retaining the first loss position and a vertical slice of the bond.

To date, all of the STACRs have been done on fixed-loss criteria, Kevin Palmer, vice president of strategic credit costing and structuring, tells GlobeSt.com.

"Initially when we rolled STACR out we wanted to make it as easy as possible to understand," he says. The first loss offering in many ways is closer to the way losses are handled in private-label securitizations, he says.

Freddie Mac is rolling out this product because of its overarching goal to transfer as much risk as possible off of its balance sheet, but there is also demand for this particular structure too, he continues. "Under a calculated loss framework, STACR is accounted for in a similar way to how a derivative is accounted for," he explains, meaning that it floats through the income statement. Going forward, it will be treated more like an insurance product, which is not recorded on a mark to market basis but rather on a cash basis.

"Some investors, specifically insurance companies, have not played a big role to date in this market because of the mark to market nature of calculated loss structures. We think this new structure will help."

Palmer says this offering is the first step in a broader evolution the GSE has in mind for STACR. He says that eventually all of the STACR offerings will be based on actual loss.