Thursday, 20 September 2018

Uphill battle

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Since going into conservatorship last year, Fannie Mae and Freddie Mac have had to change their borrowing strategies. Forced by circumstance to borrow hundreds of billions from the US Treasury, the two government-sponsored agencies have only recently made significant headway again in the private funding markets. Timothy Sifert reports.

Fannie Mae and Freddie Mac, the unprofitable, debt-laden government housing agencies, own or guarantee 56% of the single family mortgages in the US, worth US$5.4trn. It was with this significant portion of the US economy in mind that the government stepped in last September and placed the two GSEs in conservatorship to the Federal Housing Finance Agency. The loss-making entities were threatening to undermine the vital housing industry and their financing strategies naturally had to change tack to abide by new standards.

To prop up Fannie and Freddie specifically, and GSEs in general, the Treasury established three financing vehicles: the senior preferred stock purchase agreements; the GSE MBS purchase programme; and the GSE credit facility. The Fed, in addition, committed to making open market purchases of agency debt, to the tune of US$200bn, providing plenty more financing capacity.

By the end of May the Fed had bought more than US$507bn in MBS and US$81bn in direct obligations. The Treasury bought US$167bn through its MBS programme. Under the preferred stock plan, Fannie and Freddie have received US$34.2bn and US$50.7bn from the Treasury, respectively. Each agency was granted US$200bn under the stock plan.

Thus far, the efforts have paid off. Financing in the capital markets has got both easier and cheaper. For Fannie, financing in the private markets is getting gradually more attractive. On December 9 2008, it printed a US$3bn 2.875% tranche of five-year notes at 99.857 to yield 2.906% or 121bp over Treasuries. On February 3, it printed a US$7bn 2.75% five-year at 99.921 to yield 2.767% or plus 93bp. On March 12 it priced a US$9bn 2.75% five-year at 99.625 to yield 2.831% or plus 90bp. And on May 13 it came to market with a US$5bn 2.50% five-year at 99.855 to yield 2.531% or plus 55bp.

Of course it still has a way to go: In February 2007 it printed at five-year at plus 27bp.

Freddie Mac, for its part, has been following the same course. It printed US$3.5bn in 2.50% offering of five-year notes on January 6. The reference notes printed at 99.437 to yield 2.621%. Then its US$4.5bn 2.50% tranche on April 23 printed at 99.781 to yield 2.547% or plus 56bp.

As of May, Freddie issued US$36bn of reference notes in 2009 and has about US$259bn in reference notes and bonds outstanding. It has also issued US$217bn in medium term notes and US$278m in short term debt. All told, as of June 8, it has issued US$531bn in debt this year. That’s a similar pace as last year when it priced US$1.082trn in debt all year, and a faster pace than in 2006 and 2007, when it priced US$785.9bn and 790.2bn respectively.

However, even with the significant public and private backing, the two GSEs’ are probably going to need more capital going forward. The FHFA director James Lockhart warned a House Financial Services subcommittee this month that the near future does not look bright. “The short term outlook for the enterprises’ financial results is poor,” he said. “Credit-related expenses and mark-to-market losses are influenced by market conditions that are expected to remain difficult during 2009.”

In the first quarter of the year, Fannie Mae lost US$23.2bn and Freddie Mac lost US$9.9bn, principally due to credit loss provisions. Loan loss reserves increased 70% to US$42bn at Fannie and 50% to US$23bn at Freddie during the quarter. More losses are on the way, too, which could point to greater reliance on government largess.

“Continued poor financial performance will result in additional requests for preferred stock investment from the Treasury Department in 2009,” Lockhart said. “However, both enterprises have stress tested their capital shortfalls and expect the Treasury Department’s commitment to fund up to US$200bn in capital for each enterprise to be sufficient.”

The FHFA was created in September to merge the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board and the Department of Housing and Urban Development, to regulate Fannie, Freddie and the dozen Federal Home Loan Banks. As the GSEs evolve and exit conservatorship under the aegis of the FHFA, their roles might change again – and their financing strategies along with it.

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