WASHINGTON–Fannie Mae and Freddie Mac plan in 2016 to push the sales of new types of securities that in effect transfer potential losses in a housing downturn to private investors.
Called “Connecticut Avenue Securities” by Fannie Mae and “Structured Agency Credit Risk” by Freddie Mac, the securities are “essentially bonds whose performance is tied to that of a pool of mortgages. If the mortgages default, investors in the bonds could lose some or all of their principal,” The Wall Street Journal reported.
The Wall Street Journal said that proponents of the risk-transfer deals see them “becoming a mainstay of the bond and housing markets over time, perhaps even entering major bond indexes tracked by mutual funds and exchange-traded funds.”
The sales are especially notable because issuances of private-label mortgage-backed securities, which also give private investors mortgage exposure, are “still moribund.”
The securities are designed to appeal to “yield-starved investors” willing to take on the risk, the Journal reported.
Fannie and Freddie already have sold about $25 billion of securities since 2013 to private investors, according to the Journal, which said that the Federal Housing Finance Agency, which regulates Fannie and Freddie, indicated plans are to transfer to private investors in 2016 the credit risk on 90% of the unpaid principal balance of the riskiest mortgages the companies back—where homeowners get a mortgage of more than 20 years and make less than a 40% down payment.
“Fannie and Freddie don’t make loans. They buy them from lenders, wrap them into securities and guarantee to make investors whole if the mortgages default,” the Wall Street Journal reported. “In practice, that has meant that investors have taken on the risk of losses if interest rates rise, but have left the government with the risk if borrowers default. The new securities—along with other methods Fannie and Freddie use to lay off risk—mean that the government is increasingly transferring that default risk to private investors as well.”