New REITs, Hedge Funds Buy Into C-Series

WASHINGTON, DC—Fannie Mae's latest Connecticut Avenue Securities series saw a number of new institutional investors participate, Laurel Davis, vice president for credit risk transfer at Fannie Mae, tells GlobeSt.com. These included new asset managers, hedge funds, REITs and insurance companies. "We also saw new international participation in the book," she says.

It is a telling sign for the two-year-old credit risk transfer offering from Fannie Mae, a structure that passes off much of the risk to third-party investors -- especially as interest rate increases are clearly imminent. These risk-sharing deals -- Freddie Mac also has its own version -- are typically issued with floating rate coupons, which reduces investor duration risk. "On the margin, we would expect greater interest for floating rate securities in a rising rate environment, especially since these are uncapped floaters, which are relatively rare," Davis says.

Fannie Mae has been bringing these transactions to the market about once a quarter. Its latest was a $1.56 billion note offering that scheduled to settle on July 22. Since the program began in October 2013, Fannie Mae has issued $10 billion in notes through CAS, transferring credit risk to private investors on single-family mortgage loans with an outstanding unpaid principal balance of over $390 billion.

Pricing for both the 1M-1 tranche and the 1M-2 tranche was one-month LIBOR plus a spread of 150 basis points. Pricing for both the 2M-1 tranche and the 2M-2 tranche was one-month LIBOR plus a spread of 500 basis points. Fannie Mae retained the first loss and senior piece of the structure, as well as a vertical slice of the M1 and M2 tranches in both groups.

The GSE plans to come to market with its first actual loss deal sometime in the fourth quarter of 2015, moving away entirely from the current structure of fixed severity deals.

"We are trying to build liquidity in the program and believe this can best be achieved through regular, consistent offerings," Davis says. "Our long-term goal for the program has always been to get to an actual loss structure over time so we feel we can build better liquidity by switching the program from fixed severity to actual loss and then sticking with one format."