Freddie Mac may sell $40 billion of unsecured debt this year with a repayment pace mirroring its home-loan bonds as the company seeks to lower costs with notes that cut mortgage investors’ refinancing risk, an official said.
The government-supported mortgage company sold $3 billion of the Mortgage-Linked Amortizing Notes on Jan. 13, paying 2.06 percent on debt maturing in 10 years. McLean, Virginia-based Freddie Mac may offer the bonds about 10 more times this year after last week’s offer, in which it had expected to sell as much as $1.5 billion and received orders for about $4.5 billion, said Mohit Sudhakar, a senior portfolio director for debt and liquidity management. The sales may raise $20 billion to $40 billion, he said.
“The intent is to make this into a larger, more regular program,” he said in a telephone interview. “We were very positively surprised by the reception we got.”
The company, which owns $663 billion of mortgage bonds and loans, offered the notes last week as rates on 30-year mortgages fell to a record low 3.89 percent and as it and rival Fannie Mae expand refinancing programs for borrowers with little or no home equity. The MLANs will be repaid at a pace that mirrors the speeds for a $1.2 billion pool of 30-year home-loan securities with 6-percent coupons issued about four years ago and guaranteed by Freddie Mac, Sudhakar said.
Investors’ risks from faster prepayments were cut because the debt was issued at par, compared with the mortgage bonds’ prices of about 110 cents on the dollar, he said. More homeowners refinancing, moving or defaulting can damage mortgage-bond investors by repaying them faster at 100 cents.
The MLANs also offer protection against slower repayments, by ensuring investors get completely repaid after 10 years, Sudhakar said. Unlike typical mortgage securities, or so-called covered bonds, the MLANs are backed only by Freddie Mac’s repayment pledge and not the underlying loans as well, he said.
The government directed Freddie Mac, which also guarantees about $1.4 trillion of housing debt, and Washington-based Fannie Mae to cut their holdings of bonds and loans by 10 percent each year. The U.S. seized the firms in 2008 as their losses from soaring foreclosures roiled markets.
Freddie Mac’s plan to use the MLANs to partly fund its holdings is “independent” from decisions on the size of its portfolio, Sudhakar said.
Selling the mortgage bonds Freddie Mac is financing with the MLANs would risk pushing down prices of the securities, he said. Using “more traditional tools” such as interest-rate swaps and options to manage its prepayment risk has become costlier as tightened credit and lower property prices leave homeowner refinancing less sensitive to interest rates, he said.
At current rate levels, generic Freddie Mac 6 percent mortgage bonds carry a projected duration of about 2.6 years, according to data compiled by Bloomberg. The 2.06 percent yield on the MLANs sold last week compared with a rate of about 0.34 percent on three-year U.S. Treasuries, Bloomberg data show.
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