By Dow Jones Business News, October 11, 2013, 10:55:00 AM EDT
U.S. mortgage-finance giant Fannie Mae ( FNMA ) will likely sell its $675 million debut offering of derivative
securities at lower-than-expected yields after the deal garnered multiple times the required investor orders, according
to several investors considering the deal.
The securities are synthetic debt instruments structured to saddle private investors with some of the risk when
homeowners stop paying mortgage bills on loans that Fannie Mae owns or guarantees.
Feverish demand for the securities follows intensive marketing by Fannie Mae executives who met with hundreds of
investors in recent weeks, including many at an asset-backed bond conference in Miami this week. At least two investors
said Fannie Mae was unable to meet with them because the executives were fully booked.
Fannie Mae's effort is aimed at finding ways for the U.S. government to shed its responsibility for financing U.S.
homeowners, and to draw investors back to mortgage markets after they shunned them after suffering steep losses in the
financial crisis. Fannie and rival Freddie Mac ( FMCC ) don't make mortgage loans, but they buy loans made by other
lenders and package them into mortgage-backed securities that they sell to investors, with a guarantee on payments.
The government seized the two companies at the height of the financial crisis in 2008 to prevent losses from
exacerbating fallout from the housing bubble.
Fannie and Freddie are meeting demands of the Federal Housing Finance Agency, their regulator, which wants to reduce
how much taxpayers have on the hook in the housing market. The Treasury has supported the companies with $188 billion
through purchases of special preferred stock since 2008, which has so far required about $146 billion in dividend
payments by the two companies.
The Fannie Mae deal, known as Connecticut Avenue Securities, is made up of synthetic notes whose value hinges on
performance of $28 billion of mortgages acquired by the firm last year. The longer-term and riskier half was initially
oversubscribed by 17 times at a proposed yield near 6.42%, or 6.25 percentage points over the one-month London interbank
offered rate, some of the investors said.
Fannie Mae on Friday set spread guidance at 5.75 percentage points, but it was unclear if any investors dropped out.
Formal pricing isn't expected on Friday. A Fannie Mae spokesman declined to comment.
But early demand on the deal, which was announced Thursday, may suggest that investors are warming to mortgage-credit
risk in exchange for extra yield. Similar risk-sharing securities pioneered by Freddie Mac in July have rallied in
price, sending yields down to about 5.85 percentage points over the Libor benchmark this week, from 7.15 points at the
Gains for Freddie Mac's issue show that "the market is hungry for credit-sensitive bonds," said Jeana Curro, a
strategist at RBS Securities, at the asset-backed securities conference.
At the same time, demand for the risk-sharing deals doesn't mean investors will suddenly embrace bonds from private
Demand for some recent private issues has waned because rising interest rates are seen reducing the refinancing on
mortgages, extending the expected life of the bond paying below-market interest rates. Investors in private deals are
also concerned about their power to demand lenders repurchase faulty loans, a worry mitigated in the Fannie Mae and
Freddie Mac deals where investors aren't directly exposed to the loans.
Freddie Mac's deal had provisions that were "extremely investor friendly," including a final 10-year maturity, Laurie
Goodman, director of the Housing Finance Policy Center at the Urban Institute, said at the asset-backed securities
Write to Al Yoon at firstname.lastname@example.org
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