Freddie Mac to shift some portfolio risk

Freddie Mac, the US government-controlled mortgage financier, aims this year to sell securities that would transfer some of the risk associated with its portfolio to private investors, a company official said on Tuesday.

Since the collapse of the US mortgage and housing markets during the financial crisis, Freddie Mac, Fannie Mae and another housing group Ginnie Mae own or back about 90 per cent of new mortgages in the US.

Private investors have lost their appetite for residential mortgage bonds not backed by these large groups after widespread defaults and foreclosures in the last few years resulted in sharp losses on bonds backed by subprime and other mortgages that turned out to be riskier than investors thought.

Freddie Mac is working on the structure for a type of security, either cash or synthetic, that would pay a higher yield than mortgage bonds backed by Freddie in return for investors agreeing to absorb the first losses experienced by a pool of mortgages.

The plans were outlined by Gregory Reiter, vice-president of security strategy at Freddie Mac at the annual conference for the American Securitisation Forum, an industry group.

Valerie Kay, a managing director at Morgan Stanley, said there could be “a long list of investors” interested in such securities, but only if there is more clarity on proposed regulations for the mortgage market as part of broader financial regulatory reform.

Otherwise, there would just be bespoke transactions, she said.

Garry Cipponeri, director of capital markets at Chase Mortgage Bank, was less optimistic. “I don’t see it working all that well,” he said.

Investors could demand high yields to take the risk of the so-called “first losses” in these transactions, compared with the very low fees that Freddie and Fannie now charge to guarantee mortgages.

“When we see the prices where investors are willing to take the ‘first-loss’ risk, it will just exacerbate the difference between the public and the private markets,” Mr Cipponeri added.