St Casimirs Mortgage Minute

Fannie and Freddie Give Birth to New Mortgage Bond

In an effort to avoid billions of dollars in potential taxpayer losses in another mortgage crisis, the federal government is rolling out a new asset class. Next year, Fannie Mae and Freddie Mac plan to increase sales of new types of securities that transfer potential losses in a housing downturn to private investors. The securities -- Connecticut Avenue Securities by Fannie Mae and Structured Agency Credit Risk by Freddie Mac -- essentially are bonds whose performance is tied to a pool of mortgages, with investors losing some or all of their principal if the mortgages default. Earlier this month, the Federal Housing Finance Agency said Fannie and Freddie would transfer the credit risk on 90 percent of the unpaid principal balance on the riskiest mortgages backed by the companies to private investors in 2016. It remains uncertain how much appetite investors have for the new securities, but observers say they currently are the only outlet for investors to get exposure to new residential mortgage credit risk.

From "Fannie and Freddie Give Birth to New Mortgage Bond"
Wall Street Journal (12/29/15) Light, Joe