Fannie Mae issued its first-ever fixed-rate commercial mortgage-backed bond using the Secured Overnight Financing Rate swap curve last week in a move away from scandal-ridden Libor.
The largest US mortgage government-sponsored enterprise and its sibling Freddie Mac have been leading the dollar securitization market in utilizing SOFR as a reference rate for floating-rate CMBS, well ahead of the cessation of some dollar London interbank offered rate fixings at the end of 2021. Last week, Fannie expanded its SOFR usage by referencing SOFR-linked interest rate contracts for a fixed-rate transaction.
The US$1bn Fannie Mae Multifamily REMIC Trust 2022-M1 priced last Wednesday, fetching strong investor demand. The US$64.6m fixed-rate A1 tranche which carried a weighted-average life of 6.47 years sold at SOFR swaps plus 36bp and the US$737.6m fixed-rate A2 class with a 9.69-year WAL cleared at SOFR swaps plus 52bp.
"Market participants had begun socializing the use of the SOFR swap curve ("P-spread") when quoting fixed-rate ACMBS trades in late 2021 and the transition of new-issue ACMBS to this benchmark is one more step in that journey," said Dan Dresser, Fannie Mae's senior vice president of multifamily capital markets and pricing in a statement on Monday.
Interest rate swaps have been the benchmarks for fixed-rate ABS, RMBS and CMBS since the late 1990s. They measure the cost of exchanging fixed and floating-rate cash flows of various tenors, and are used as hedges by traders and money managers against rising interest rates.
Structured finance participants are grappling over the benchmarks to adopt for fixed-rate securitizations instead of Libor-based swaps, most of which will be published until June 2023. Market participants are focusing on three rates: the SOFR swap curve which is referred to as "P-spread" or "P-curve"; interpolated Treasury yield curve which is dubbed "J-curve" and yields on on-the-run Treasury securities that are closed to the weighted-average life of the securitized paper.
However, the lack of a credit component in SOFR and a relatively small term market have curbed the industry's transition to that benchmark.
Amherst Pierpont was the lead manager and bookrunner for Fannie Mae's deal, which is expected to settle on January 28.
It underscored how the mortgage agencies are leading the way in the structured finance market's departure from Libor-based securities and derivatives, which has been relatively slow compared with other parts of the credit markets.
"At a high level, the GSEs are light years ahead of the private label market as both Freddie Mac and Fannie Mae multifamily businesses have already fully transitioned to SOFR," JP Morgan analysts wrote in a research note. "The transition plan across private label has not been as organized."