Freddie Mac has several claims to fame over the last 12 months. One of the most arresting is that the GSE rejuvenated the credit risk transfer sector following the most traumatic period of market turbulence and investor alarm in the last decade.
On 8 July, over three months after its previous STACR deal and when this period of acute market dislocation was to a large extent still prevailing, Freddie closed its 2020-DNA3. Rewarded for its boldness, the original US$555m deal was upsized to US$1.106bn. It drew 52 investors, over 80% of which were based in the US, but five names (one of whom resided outside the US) were entirely new to the CRT space.
“In April, it was a very tough time in all markets, but we saw good price recovery in May. And in the second half of that month we had conversations about the capacity to bring a new transaction and in the second half of June we felt confident enough to bring a deal,” says Mike Reynolds, vp of single-family CRT at Freddie Mac.
Until this deal was launched, it had looked likely that the Covid-19 crisis had put paid to the agency CRT market for good. Indeed, Fannie Mae has not brought a CAS deal since before the coronavirus crisis engulfed the market.
The ice-breaking 2020-DNA3 deal did contain several features that were designed specifically to help the transaction cope with the unique circumstances. In particular, any loans that were reported to be in forbearance were excluded from the pool.
This went a long way to buy investor confidence, says Freddie, but it also increased credit enhancement on all tranches. The retained first loss tranche was increased from 10bp to 25bp, the B1 CE was increased from 60bp to 75bp and the M2 CE from 110bp to 175bp.
Spread levels were also wider than had been seen in recent STACR deals. But not as wide, suggests Reynolds, as the general increase in the cost of credit seen during the selloff, thanks to these additional investor-friendly buffers.
Prior to the launch, Freddie also organised a series of virtual events spread over two weeks in June, in which it met its valued investor base to discuss a wide range of topics of concern and interest. The events were attended by over 270 investors from 100 different firms, and represents the most well attended the borrower has ever mounted.
Not only was DNA3 a success, it cleared the way for further issuance. Almost immediately thereafter, Freddie completed an ACIS transaction, which covered an additional US$425m of losses on the US$48.3bn DNA 3 reference pool and was also doubled from original size.
Another four STACR deals have followed in the wake of DNA3 and in fact 3Q20 was the busiest quarter for Freddie in the CRT market ever.
In mid-October, Freddie made the headlines again when it sold the first CRT deal referencing SOFR rather than Libor. The latter has been in use in a vast range of financial instruments since time immemorial, but is due to exit the stage at the end of 2021.
The STACR REMIC 2020-DNA5, worth US$1.086bn, comprised four tranches. The M1, the narrowest, was priced to yield 130bp over 30-day average SOFR, while the B2, the widest, yielded 1150bp over 30-day average SOFR. “As a member of the Alternative Reference Rates Committee (AARC), Freddie Mac has been a leader in the shift from Libor to SOFR,” says Reynolds.
The GSE had been in talks with investors, broker-dealers, data vendors and other market participants before it took the plunge to ensure that its transition from Libor to SOFR - still an unfamiliar benchmark to most in the market - would be as smooth as possible.
The next SOFR deal is due in November 2020 and, in fact, Freddie is now back to its regular issuance schedule. After the benighted year of 2020, this is no small achievement.
Honourable mention: Citi
Quietly, without much fuss, but with persistence and continuity, Citi has demonstrated considerable commitment to the CRT market in the US. JPMorgan and Goldman Sachs have joined the arena in the last 12 months, broadening the scope of participation in the CRT market, but Citi has been there for years.
Its deals tend to slip under the radar screen, often arranged between the borrower and one or two investors. But for Citi, the CRT market is as fundamental a mechanism of capital management as any of those that are more generally used by the majority of US financial institutions. It is the grand-daddy of the non-GSE CRT market in North America.
For complete coverage of SCI’s 2020 CRT Awards, click here.-