The risk sharing deals - called Structured Agency Credit Risk (STACR) Debt Notes (issued by Freddie Mac) and
Trading spreads in the secondary market have tightened considerably since the initial transactions were issued in mid-2013. We don't believe this has been driven by any perceived inference of federal government support if losses arose. These deals' lack of explicit government guarantee, coupled with the clear and strategically important intent of the
We detect a mix of supply-demand and other drivers behind the tighter trading levels. Existing risk sharing deals have been issued with floating rate coupons, which reduces investor duration risk. The spreads over LIBOR have been fairly attractive, but have lowered in more recent transactions as liquidity has improved. Pricing on the M1 class of the first STACR deal (issued in
Furthermore, the FHFA outlined in its most recent strategic plan a goal of tripling each GSE's risk sharing volumes over 2013 levels. Based on recent issuance, we expect GSEs will easily meet these goals. Thus, expectations that the GSEs will supply a steady stream of deals will continue to bolster liquidity in the secondary market, which also helps explain the price tightening.
The level of transparency associated with the transactions (including TRACE reporting) and underlying reference pools adds to the market's growing comfort level.
Mortgage risk transfer securities bear several unique characteristics compared to traditional RMBS. One key difference is that these deals are structured as synthetic credit transfers, but are technically unsecured obligations of the GSEs and are consolidated on their balance sheets. This structure, which is largely driven by certain
Private label RMBS issuance has shown some signs of life in 2014, but volumes remain a fraction of pre-crisis levels. Five deals had been issued through last week, totaling
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Financial Institution Fitch Wire
Source: Fitch Solutions
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