Have Sovereign Funds Embraced Fannie and Freddie’s New Mortgage Babies?


The answer is a partial yes. State-owned housing behemoths Freddie Mac and Fannie Mae have tapped into two major investment themes. The first theme are asset owners such as sovereign wealth funds and U.S. pensions’ unquenchable desire for fixed income yield. Whereas the likes of large wealth funds such as Singapore’s GIC go direct when investing in yield investments, while some wealth funds with smaller in-house capabilities opt to use intermediaries such as money managers and hedge funds to get this type of exposure. The second theme circles around risk transfer. Fannie Mae and Freddie Mac want to move as much risk as possible into these these mortgage insurance-like products. These new securities which monitor credit events, could expose these investors to lose some or all of their principal if the underlying mortgages default. With wealth funds fixated on yield, these new securities distribute risk of mortgage default to different tranches – sound familiar? Fannie Mae’s has called these products the Connecticut Avenue Securities, while Freddie Mac’s calls them Structured Agency Credit Risk (STACR). Typically for the STACR bonds they are held in 4 structures. M1 and M2 are usually rated and more conservative. M3 is usually not rated. Finally, the riskiest, the Class B bond, is treated as a derivative for U.S. federal income tax purposes in most cases.

Freddie Mac Issued STACR Transactions to Date

Transaction Issuance Date Issuance Volume – USD
STACR 2013-DN1 July 26, 2013 500,000,000
STACR 2013-DN2 November 12, 2013 630,000,000
STACR 2014-DN1 February 12, 20114 1,008,000,000
STACR 2014-DN2 April 9, 2014 966,000,000
STACR 2014-DN3 August 11, 2014 672,000,000
STACR 2014-HQ1 August 11, 2014 460,000,000
STACR 2014-HQ2 September 15, 2014 770,000,000
STACR 2014-DN4 October 28, 2014 611,000,000
STACR 2014-HQ3 October 28, 2014 429,400,000
STACR 2015-DN1 February 3, 2015 880,000,000
STACR 2015-HQ1 March 31, 2015 860,000,000
STACR 2015-DNA1 April 28, 2015 1,010,000,000
STACR 2015-HQ2 June 9, 2015 425,600,000
STACR 2015-DNA2 June 29, 2015 950,000,000
STACR 2015-HQA1 September 28, 2015 872,000,000
STACR 2015-DNA3 November 2015 1,070,000,000
Total   12,114,000,000

Source: Freddie Mac filings

Ownership Splits by Investor Type

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