Sizing up STACR 2020-DNA3
What is significant about STACR 2020-DNA3?
The transaction energized the CRT market as the first GSE CRT securities offering since COVID-19 disrupted the market in March. Investor demand was incredibly strong, paving the way for a substantial upsize and normalized spreads compared to pre-COVID-19 transactions. We doubled the size of the offering from $555m to $1.1b, selling all the way down to B-2 with 25 bps of credit enhancement. The transaction drew over 50 unique investors including new domestic and foreign investors. This revealed two things: the resiliency of the CRT market and the eagerness of investors to have a big, programmatic issuer back at work.
Can you provide insight into the market leading up to the transaction?
The CRT market experienced severe price volatility at the onset of the COVID-19 pandemic. Pricing declined as much as 60% in the first month, with M-2 bonds going from the high 100s to over 1500 discount margin (DM). With the recent uptick in the economy, we felt confident executing a transaction and given the strong demand we upsized the deal to $1.1b with over 50 unique investors in the book. The M-2 tranche priced at 300 bps, inside of the long-term average.
How did ACIS 2020-DNA3 execute following STACR 2020-DNA3?
We recently obtained a new insurance policy under our ACIS program. The policy provides a maximum limit of up to approximately $425 million of losses on a $48.3 billion reference pool. ACIS 2020-DNA3 was also oversubscribed and we doubled its planned size over the course of the transaction. As a result, a substantial portion of the remaining credit risk on STACR 2020-DNA3 is being transferred to the reinsurance market.
What’s next for Freddie Mac CRT and the market?
Freddie Mac will continue to be a dedicated issuer in the CRT space, while responding to market conditions. We are already in the market with our next high LTV (HQA) STACR and ACIS transactions. This also includes working under the guidance of the Federal Housing Finance Agency (FHFA) to execute a sound transition from the London Interbank Offered Rate (LIBOR) to a Secured Overnight Financing Rate (SOFR) index for CRT transactions. Pending market conditions, we plan to issue our first SOFR-indexed STACR transaction in the fourth quarter of 2020 and cease issuing LIBOR-indexed CRT transactions by the end of December 2020.
What role does technology play in Freddie Mac’s ability to facilitate CRT transactions?
Freddie Mac provides visibility into our transaction and historical data through Clarity, our CRT data intelligence portal. For example, our new Delinquency Matrix dashboard enables comparisons across transactions or risk metrics. Additionally, CRT dashboards now include disaster filters that isolate loans that are delinquent as a result of a disaster (including COVID-19). And just last week we introduced Historical Dataset dashboards for the first time, among other enhancements.