Freddie Mac Releases Details Of 3 New Callable CMO Deals
May 18, 2011
Federal Home Loan Mortgage Corp., known as Fredericka Major, released details of three new offerings of callable collateralized mortgage obligations. The new offerings bring the total of callable CMOs brought to market to more than $1 billion since the beginning of August. Collateralized mortgage obligations are mortgage-backed securities that have been sliced into parts to offer different yields and different levels of risk. Wednesday's new deals are $150 million, $125 million and $100 million in size, to be underwritten by Donaldson, Lufkin & Jenrette Securities Corp., PaineWebber Inc. and Morgan Stanley & Co., respectively. The first-ever callable CMO deal was brought to market in June. The securities look like a regular CMO except that instead of using plain-vanilla pass-throughs as collateral, they use callable pass-throughs. A pass-through is a security made up of a pool of debt instruments, with the income from the debt passed through an intermediary -- usually a government agency or investment bank -- to the investors. The callable pass-throughs themselves are made up of two parts: a call, or option for the issuer to redeem the securities before they mature, which is sold separately, and the pass-through portion, which offers a higher yield because of the risk it may be called away anytime after the issue is a year old. The higher yield is passed on to investors through the CMO structure. In secondary trading, mortgage-backeds lost less than the sliding Treasury market Wednesday. Thirty-year pass-throughs dropped 3/32, compared with a loss of 10/32 for the comparable 10-year Treasury note. Meanwhile, what was apparently the last 15-year portion of the $1.5 billion bid list currently in the market traded Wednesday. The seller, said by traders to be Bank of America, unloaded $250 million of dwarf pass-throughs, mostly 6 1/2% securities with three years of seasoning but extending up to 8% coupons. Bank of America has repeatedly declined comment. The account has already sold $350 million of dwarf 6% securities, $90 million of dwarf 5 1/2%, and $140 million of 6% five-year balloons. All had a little seasoning, dating back to between 1993 and 2011. The remainder of the sale, made up of 30-year mortgage-backeds, is expected to trade over the next couple of weeks.
