By Deborah Levine
The increasingly public debate over what the government will
eventually do with mortgage giants Fannie Mae (FNM) and Freddie Mac
(FRE), taken over last fall, leaves the mortgage market still
waiting for a decided resolution, analyst said Thursday.
The Obama administration is considering a variety of options to
overhaul mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE),
including folding the companies into a new federal government
entity, the Washington Post reported Wednesday.
One option is to split the companies and putting their troubled
assets in a new federally backed corporation, and possibly let to
more viable portion of the company resume being
shareholder-owned.
The important but unclear aspect is whether the entities, in any
form, continue to carry the government's implicit support of their
debt to keep their borrowing costs low. The so-called government
sponsored entities sell their own debt to finance purchases of
mortgage-backed securities, which are bundles of individual
mortgages. Their ability to finance those purchases at a low cost
enable them to accept mortgages with lower rates, which helps
homeowners.
"As long as the government guarantees are there, the products
will trade as they do," at rates far below what fully private
companies have to pay, said Kevin Giddis, managing director of
fixed income for Morgan Keegan & Co. "Any change would more
than likely have a negative impact on the housing market."
Mortgage rates have risen over recent months as the economy
appears to be improving, pushing up yields on Treasurys, which are
the benchmark for a broad array of securities including mortgage
debt. The rate on a 30-year fixed rate mortgage rose to 5.65% in
the latest week, according to Bankrate.com. They fell to a low
around 4.85% in the April.
More likely than such a "good bank/bad bank" arrangement for
Fannie and Freddie, the firms may be structured like a public
utility, said bond strategists at RBC Capital markets.
"The firms would be even more highly regulated than they are
today, with products and pricing approved by a government board,
commission or agency," said Ira Jersey, head of U.S. interest-rate
strategy at RBC. "Assuming adequate capital ratios were kept, the
GSEs would be allowed to pay out a significant amount of profits as
common share dividends."
But in any case, the amount of debt held by the entities is also
likely to be "dramatically" smaller, he said. The entities have
been instructed to reduce the amount of debt they hold - currently
near half of all outstanding home loans.
In all likelihood, the agencies will probably look rather
different than they were, said Matthew Mac Donald, a bond portfolio
manager at DWS Investments.
The firms, one which grew out of the Great Depression, will go
back to their more traditional role of facilitating a basic social
goal: extending mortgages so more Americans can own homes. Their
basic role was standardizing underwriting rules and pooling loans
and relieving some of the credit risk for investors interested in
owning mortgages.
"The uncertainly isn't rattling the market at all," he said.
"It's a healthy discussion as long as the government doesn't
indicate it may pull support for existing programs and
securities."
Fannie and Freddie have long been strange hybrids of government
and private institutions and may, at least initially, end up closer
to the government end of that spectrum because of lack of
confidence in ratings for securitizations, MacDonald said.
Of all the possible outcomes, if they government chooses to make
the entities fully private, "surely rates would increase," said
Jeana Curro, a mortgage strategist at UBS Securities. "If they lose
their implicit government guarantee, investors would need increased
compensation."
Investors in mortgage-backed debt currently demand yields about
0.90 percentage points above Treasurys to compensate for the
different credit structure, analysts said. Spreads between
corporate bonds and Treasurys are almost three times that.
-Deborah Levine; 415-439-6400; AskNewswires@dowjones.com