“Nomura’s assignment on this transaction combines the strength of our secondary trading business in CRT with the banking and syndicate team’s significant structuring acumen and distribution capabilities. We are extremely appreciative of this mandate from Fannie Mae,” says Jack Kattan, head of asset backed finance Americas at Nomura.
The government sponsored enterprise (GSE) credit risk transfer programmes are the largest risk transfer shelves in the world and have proved a stunning success in shifting risk back to the private sector from the agencies. Since launching in 2013, they have effectively created a new market from scratch, and reinvigorated mortgage trading and investment.
That makes improvements to the programmes of crucial importance — not just for Fannie Mae and Freddie Mac, but for investors seeking new trading opportunities and different exposure profiles to the risk on the GSE balance sheets.
In Fannie Mae’s case, the problem was its older deals had been deleveraging. House prices appreciated, mortgages paid off, and the subordinated tranches it had retained from 8 transactions (containing 11 groups) during 2015 and 2016 were looking increasingly inefficient — the deals no longer transferred as much risk as when they were first issued.
“Fannie Mae gets credit risk transfer based on the current characteristics of the loans, so they’ve been losing some of the benefits that they got from transferring that risk, back in 2015 or 2016,” said Vishal Elijah, an executive director and senior securitization banker at Nomura. “So the goal was to get that benefit again by issuing that previously retained subordinated risk.”
So Fannie decided to sell these on to the market as well, in its debut “Seasoned B” transaction. That meant a highly complex deal structure. Each seasoned B piece referred to a separate reference pool, with its own payment and credit characteristics, waterfall, and triggers, and these were not cross-collateralized — a loss in one of the underlying B notes means a loss to the noteholders of the deal, even if the other pools pay.
As these were legacy deals, some credit issues had started to emerge, and Fannie Mae’s requirements for the success of the deal meant that delinquent loans could not be stripped out of the underlying transactions — in contrast to a similar deal issued by Freddie Mac, which cleaned the pool before relevering the sub notes.
The deal, which saw $966m of notes placed to the market, actually referenced a staggering $152bn of mortgages through the 11 portfolios, underlining the scale and complexity of the challenge ahead.
“What was important to us was making sure that investors could model this correctly, there are a lot of nuances to that, given that the pools are not cross-collateralized, and given that you have 747,000 loans in here,” says Elijah. “Part of our job though is not just modelling the deal to sell it, but making sure investors know that what they are buying is performing up to expectations, and that was also a Herculean effort — it’s not just linking back to the eight different legacy transactions and the reporting there, because that’s too confusing for investors to go through.”
Unfortunately, as the structure was coming into focus, the pandemic was already heading down the tracks.
“We had many conversations with Fannie Mae as to whether or not this was the right time to proceed with a transaction, but ultimately the demand we saw from the investor community was very robust, despite the volatility that surrounded us at the time,” says Pat Quinn, head of securitized products syndicate in securitization syndicate at Nomura. “The vast majority of investors that were involved in regular-way CRT transaction were also involved in this transaction, and showed a willingness to dig into the complex structure, understand that and participate.”
Deals like this are never going to be coming to market every day — they solve a specific problem for two particular issuers, and even entities the size of Fannie and Freddie cannot generate enough legacy deleveraged CRT deals to make seasoned B deals a regular market feature. But nonetheless, this issue navigated tough markets, structural complexity, and solved a client problem with considerable flair. For that reason, it is GlobalCapital’s Innovative Securitization Deal of the Year. GC
