While Congress might have granted considerable flexibility for potential
homebuyers by adjusting the conforming loan limit in specific high-end
real estate markets, it simultaneously produced a significant financial
predicament for the government-sponsored enterprises (GSE) Fannie Mae
and Freddie Mac.
The Federal Housing Finance Agency (FHFA) operates as the official GSE
regulator, requiring both entities to offload all credit risk associated
with their mortgage expenditures. This mandate complicates Freddie Mac’s
handling of “super-conforming” loans, which are mortgages
created using higher maximum loan limits that are permitted in designated
The higher limits are intended to provide lenders with needed liquidity
while also lowering mortgage-financing expenditures for borrowers. However,
there are federally mandated caps on the number of super conforming loans
GSEs can integrate into standard mortgage-backed securities, subsequently
burdening Freddie Mac with a considerable amount of loans on their records
that could potentially jeopardize taxpayers’ assets.
In an attempt to alleviate this looming risk, Freddie Mac developed a unique
transactional process referred to as the Freddie Mac Whole Loan Securities
Trust (WLS), in which it securitizes super conforming mortgages while
simultaneously offloading the initial risk of loss on the loans. Specifically,
the WLS operates via an issuance of guaranteed senior and non-guaranteed
subordinated certificates to provide a risk transfer securitization backed
by single-family mortgages that are purchased by Freddie Mac.
Principal and interest payments towards the underlying mortgage loans,
received from either borrowers or, alternatively, advanced by Freddie
Mac, generate the requisite funds for the fulfillment of specific expenses
of the WLS trust and subsequent distributions of principal and interest
to investors. Furthermore, as part of the WLS program, Freddie Mac guarantees
timely interest and final principal payments to the senior certificates.
The enterprise also initially retains a 5% vertical slice of the starting
balance of each subordinate certificate to align its interests with investors.
Those investing in non-guaranteed, subordinate certificates risk not receiving
full reimbursement of either principal or interest payments on the certificates
due to realized losses on the mortgage loans. The losses from the WLS
trust stem from delinquencies beyond the time window in which Freddie
Mac is required to advance, alterations implicating interest rate reductions,
principal forbearance, or liquidations where net proceeds are lower than
the indebtedness due to the trust.
Freddie Mac is currently developing its third WLS Trust, dubbed Series
2016-SC01, a transaction backed by two pools of fixed-rate, super conforming,
prime residential mortgage loans. Freddie Mac completed two prior WLS
Trust transactions in 2015; the first was for $300 million and the second
for $600 million.
The collateral pools consist of loans acquired by Freddie Mac from four
sellers (Caliber Home Loans Inc. [43.3%], Quicken Loans Inc. [38.2%],
Fremont Bank [12.6%] and PHH Mortgage Corp. [5.9%] between August 2015
and May 2016 pursuant to the terms of the Freddie Mac Single-Family Seller/Servicer Guide.
The principal underwriters of the transaction consist of Bank of America,
Merrill Lynch, Barclays, Wells Fargo, Nomura Securities and Loop Capital
while Freddie Mac will serve in some capacities on the Trust, including
Guarantor of the Senior Certificates; Seller; Master Servicer; Master
Document Custodian and Trustee.
Structurally, the WLS securitization features a two-pool 'Y' structure,
allocating principal on a pro-rata basis amongst the senior and subordinate
classes subject to performance triggers, and sequentially amongst the
subordinate certificates. The 2016-SC01 transactions are backed by a total
of 661 fixed-rate super conforming prime residential mortgage loans to
a balance of $348,375,857. Pool one is backed by 309 loans with a balance
of $161,325,571, and pool two is backed by 352 loans with a balance of
The weighted average FICO is 759 and 738 for pool one and pool two loans
respectively. The two senior tranches of notes to be issued by the securitization
trust, representing 94% of assets, are guaranteed by Freddie Mac and are
unrated. There are also two mezzanine tranches, rated Baa1 and Baa2 by
Moody's Investors Service, which are not guaranteed and so transfer
credit risk to investors. The Trust will also issue an unrated B tranche
that will bear the risk of the first 1% of the loss. All of the notes
have a legal final maturity of July 2045.
The 2016-SC01 Trust consists of two distinct features: reimbursement of
unpaid interest on stop advance loans; and shifting certain principal
payments, subject to limits, to cover interest shortfalls to the rated
subordinate bonds based interest rate alterations and non-conforming expenses.
Freddie Mac will cease principal and interest advancement on any real-estate
owned property or loans that are 180 days or more delinquent, subsequently
reducing the amount of interest remitted to the trust and potentially
leading to interest shortfalls to the bonds. However, interest accrued
but not paid on the stop advance loans will be recovered from the liquidation
proceeds of liquidated loans, borrower payments, modifications or repurchases,
and is added to the interest remittance total, resulting in subsequent
recoveries of any interest shortfalls on subordinate bonds in the order
of their payment priority.
The weighted average loan-to-value ratio and debt-to-income ratio are both
higher than Freddie Mac’s last WLS Trust transaction conducted in
2015. Furthermore, 2016-SC01 consists of a higher percentage of substantially
larger loans than previous WLS Trusts, which could potentially generate
additional risk as the number of remaining loans decreases during the
closing stages of the transaction.
During that critical window, any defaults to sizeable loans still on the
books could dramatically reduce enhancement and trigger subsequent losses
to the subordinate bonds. So as to ensure a less risky investment, the
current package of loans supporting 2016-SC01 is backed by seasoned loans
without any one geographic concentration.
Contact Geraci Law Firm at (949) 298-8050 today, or contact
Dennis Baranowski directly for more information.