Fannie (FNM) and Freddie (FRE)

[HenryTo]

Both stocks bounced substantially since Friday afternoon and will most probably lead the next housing bull cycle, however muted it is (actually, the more muted the better, as long as the pipeline is growing). Now that the jumbo loan market is starting to freeze up as well, senators and regulators alike are entertaining the though of easing the caps of both quasi-government companies.

Following is courtesy of the WSJ:
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Big Fans for Fannie, Freddie Some Lawmakers See
One-Time Pariah Firms As Subprime Salvation
By JAMES R. HAGERTY
August 8, 2007; Page C1

The mortgage-market meltdown isn't over, but it already has produced two clear winners: Fannie Mae and Freddie Mac, the nation's biggest investors in home loans.

Until recently, politicians in Washington were arguing about how best to rein in the two giant government-sponsored companies, both recovering from accounting scandals and lapses in financial controls. Now, as worry about the housing market trumps accounting scruples, the political debate has shifted to whether Fannie and Freddie need to grow even bigger to buy more loans and calm mortgage investors.

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, yesterday called on the companies' regulator to consider raising the caps placed last year on the amount of mortgages and related securities Fannie and Freddie can hold, as a way of ensuring that plenty of money is available to fund mortgage loans.

Sen. Charles Schumer (D., N.Y.) also called for higher caps. Both Fannie and Freddie are pushing for the same move. A spokeswoman for their regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said the agency will respond to the senators shortly.

Fannie's shares gained 3.1% to close at $64.43 on the New York Stock Exchange yesterday, while Freddie was up 2.7% to $61.64.

The two stocks have held steady over the past month amid anxiety over mortgage defaults, while shares of Countrywide Financial Corp., the nation's largest home-mortgage lender, have fallen 27%.

Fannie and Freddie are benefiting because investors are still happy to buy the mortgage securities they create, backed by loans purchased from lenders scattered across the country. The two companies collect fees for guaranteeing the interest and principal payments on the loans backing those securities. Although Fannie and Freddie are private-sector companies, they were created by Congress to funnel money into housing, and investors assume that Congress would bail them out in a crisis.

Sticking With Uncle Sam

With loan defaults rising and house prices falling, investors now are shunning, at least temporarily, mortgage securities packaged by Wall Street firms and others that don't have any implied backing from Uncle Sam. That makes it hard for lenders to find buyers for loans that can't be sold to Fannie and Freddie. Regulations prevent them from buying loans of more than $417,000 on single-family homes, and they have stricter standards on down payments and verification of income than were imposed by Wall Street during the housing boom.


The result is a spike in rates on some types of loans that can't be sold to Fannie or Freddie, such as prime, 30-year, fixed-rate jumbo loans, those above $417,000. Yesterday, the average rate on such loans was 7.44%, according to a survey by financial publishers HSH Associates. That's 0.84 percentage point higher than the average rate on "conforming" loans, those that meet Fannie and Freddie's standards. Typically over the past decade, the premium paid for jumbo loans has been around 0.20 to 0.30 point.

Even middle-class people often pay $500,000 to $700,000 for a humdrum home in high-cost areas. So the higher rates on jumbo loans could be "devastating" for the housing market in some areas, says Michael Menatian, president of Sanborn Mortgage Corp., a mortgage bank in West Hartford, Conn.

As lenders recoil from riskier types of mortgages, "we're turning a lot of people away now," says Jeff Lazerson, chief executive of Mortgage Grader, a mortgage broker in Laguna Niguel, Calif.

Many investors hope that alarm over the housing market will induce Ofheo to ease restraints on Fannie and Freddie.

But Joshua Rosner, an analyst at the New York research boutique Graham Fisher & Co., describes as "mass delusion" the idea that they can save the day for investors exposed to billions of dollars of ill-advised home loans now heading toward foreclosure. For one thing, he says, Ofheo has required Fannie and Freddie to follow stricter standards, recently imposed by banking regulators, in assessing borrowers' ability to repay. So they can't buy up loads of reckless loans to speculators or people failing to pay bills.


Richard Syron, chief executive of Freddie, agrees that there are limits to what his company can do. "Neither we nor anyone else can buy at par loans that probably shouldn't have been made in the first place," he says.

Freddie's Limited Help

Mr. Syron says Freddie can provide funding to refinance many subprime borrowers stuck with loans due to reset to sharply higher monthly payments, but not most of them. In addition, he says, Freddie could help the market by buying and holding more mortgage securities packaged by Wall Street if the cap on its holdings rises.

Fannie and Freddie may be able to buy subprime mortgage securities at discounts that more than make up for the credit risk, Kenneth Posner, an analyst at Morgan Stanley, said in a research note. They also may be able to charge more for providing guarantees on securities sold to others, he said: "We can't imagine anyone complaining -- right now there's no other game in town."

The flight of other investors from the mortgage market "does show the role and the need" for Freddie and Fannie to act as steady providers of mortgage funding, Mr. Syron says. Still, he says, Freddie isn't gloating: "You don't want to take a lot of joy in other people's suffering."

Write to James R. Hagerty at bob.hagerty@wsj.com

[HenryTo]

Here is your story, rffrydr. Perversely, this "leak" should help tighten the spread on agency debt more over the next few trading days - as the market would be more than willing to lend to Freddie and Fannie given this effective taxpayer guarantee:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAbexDTdj_QM&refer=home

[HenryTo]

Right on - yield spreads on agency debt are still tighter than where they were in mid March, implying that it's still "business as usual" at the GSEs in terms of their ability to access cheap funding. The fear is over the equity only - not the debt and definitely not the agency MBSs.

As long as the GSEs' cost of capital remains relatively low, the government will not have to bail them out. As discussed in yesterday's commentary, the government, the Fed, the OFHEO, etc, are perfectly content to let them go on about their usual business and inflate their way out of their current troubles in 12 to 24 months time. At this point, only a general exit out of agency debt will require a bailout - and obviously, that will depend on the US housing sector and economy over the next few months. Stay tuned...

[rffrydr]

The implied govt. backstop here is what's pulling these shares to zero. After BearStearns we know exactly what that backup is.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Fanny was to "go-to" stock in tech-wreck:

http://financialsense.com/Market/barbera/2008/images/template_clip_image002.jpg
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

OFHEO allays recent fears in the solvency of Freddie and Fannie. Following is courtesy of the WSJ:
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Ofheo Allays Worries
Over Fannie, Freddie
By DAMIAN PALETTA
July 9, 2008; Page C5

ARLINGTON, Va. -- The top regulator for Fannie Mae and Freddie Mac said future accounting rules will likely not lead regulators to demand that the mortgage-finance giants hold more capital, addressing fears that punished the stock prices of both companies Monday.

"From our standpoint, an accounting change should not drive capital," James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told reporters at a housing conference. "It would be no difference in the risks of the two firms."

The Financial Accounting Standards Board is considering new accounting standards related to the way companies keep securities off their balance sheets. (Please see Heard on the Street.)

'Very Strange'

"I think it would be very strange for a regulator to let an accounting principle drive a capital decision," Mr. Lockhart said.

Mr. Lockhart said the companies have collectively raised more than $20 billion in capital in the past eight months. He said Freddie Mac "has another $5.5 billion that they have committed to."

Both companies "are really using this capital to do new business, and that's what's needed to be done in this marketplace," he said.

Mr. Lockhart wouldn't speculate on what caused the stock prices at both companies to slide Monday, when Fannie Mae fell 16% and Freddie Mac 18%.

'A Lot of Nervous People'

"There's a lot of reports out," he said. "There are a lot of nervous people out there. But if you look at the financials of these two companies, and how they are prudently growing their books of business and frankly how we're very close to them and what they're doing, it was hard to imagine what happened" Monday.

Tuesday on the New York Stock Exchange, Fannie Mae shares were up $1.88 a share, or nearly 12%, to $17.62, while Freddie Mac was up $1.55, or 13% at $13.46.

Separately, Mr. Lockhart said Freddie Mac was still conducting its search for a new chief executive, as the company is supposed to split the roles of chairman and CEO.

"That's ongoing and we're staying in close touch with them," Mr. Lockhart said. "You'll have to ask the company how it's going, though."

[rffrydr]

Good day to pull the plug.

http://www.latimes.com/business/la-fi-indymac8-2008jul08,0,363264.story

I remember watching the apps packages go out the back door in tractor-truck loads.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Investors in Freddie and Fannie are most likely capitulating today.

[HenryTo]

Look for more capital raisings in the future from the GSEs. In a "fat tail" scenario, I would not be surprised if both Fannie and Freddie are nationalized by the Federal government:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLs42yf_aFfg&refer=home

[HenryTo]

Freddie Mac posts better-than-expected earnings (primarily because of accounting changes) and agrees to raise $5.5 billion in capital:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aS73IOTYatp4&refer=home

[HenryTo]

A legislative update - bill not expected to make much progress, however.
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New GSE Regulator, FHA-Refinance Program In US Sen Bill
7:42 AM ET 5/13/08 | Dow Jones

By Michael R. Crittenden

Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--Fannie Mae (FNM) and Freddie Mac (FRE) would have a new regulator with broader authority over the assets the firms' keep in their investment portfolios under housing legislation being introduced by the top Democrat on the U.S. Senate Banking Committee.

The housing package cobbled together by Chairman Christopher Dodd, D-Conn., would also mirror a House-passed proposal to use the Federal Housing Administration to provide up to $300 billion in federal guarantees to help refinance struggling borrowers into affordable loans.

Dodd moved Monday to circulate the measure among Senate colleagues and others to gather reaction. The Banking committee will vote on the measure Thursday, Dodd said in a statement released late Monday. The bill, he said, "addresses the housing crisis that is at the center of our nation's current economic difficulties."

The prospects for the measure are uncertain. A spokesman for the panel's top GOP member - Sen. Richard C. Shelby of Alabama - suggested Republicans have not endorsed the bill, despite repeated attempts by Dodd to garner bipartisan support.

"It remains to be seen whether an agreement can be reached," Shelby spokesman Jonathan Graffeo said.

Shelby's lack of commitment to the legislation could make it difficult for Dodd to move forward. Democrats enjoy only a narrow majority in the Senate, and the influential Shelby has been adept at slowing or preventing progress on other pieces of legislation he did not support.

The legislation combines two major housing proposals, the FHA-backed loans to help those facing foreclosure and the regulatory overhaul for government-sponsored enterprises Fannie Mae and Freddie Mac.

The former would be a voluntary program involving lenders choosing to reduce the principle balance and interest rate on an existing mortgage. In return, the FHA would provide a guarantee on a new 30-year fixed-rate loan that could not exceed 90% of the current appraised value of the property.

The bill would also create a new regulator for Fannie Mae and Freddie Mac, giving the new agency broader authority of the two firms and the 12 Federal Home Loan Banks. The measure includes new risk-based capital requirements, limits on exit packages for company executives, and changes to the firms' housing goals.

The new regulator, to be called the Federal Housing Finance Agency, would also have new authority over the firms' massive investment portfolios. The agency would be tasked with creating new regulatory standards to ensure that the firms' portfolios are "consistent with the mission and safe and sound operations of the enterprises."

A summary of the bill said the new standards would be based on a number of considerations, including the size or growth of the mortgage market, the need for securitized mortgages, the liquidity needs of the companies, and any potential risks posed to Fannie Mae and Freddie by their portfolios.

The legislation would also give the new regulator the authority to require the companies to sell or purchase assets, particularly in "times of economic distress or market disruption."

The legislation would also increase the maximum size of the loans Fannie Mae and Freddie Mac can purchase, which currently sits at $417,000. The so-called conforming loan limit would increase to the median home price in certain high-cost areas, up to 150% of the current limit.

Additionally, the bill would create an affordable housing fund based on a percentage of "each dollar of unpaid principle balance of each enterprises' total new business purchases."

[HenryTo]

Fannie gets ready to price $4 billion in securities. This should be followed by another offering from Freddie Mac after the latter's earnings report on May 14th:
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As Fannie readies $4 bln deal, demand is strong
Thu May 8, 2008 6:41pm EDT

By Jennifer Ablan and Al Yoon

NEW YORK, May 8 (Reuters) - Fannie Mae was expected to price $4 billion of securities on Thursday, as the biggest provider of financing for U.S. residential mortgages shores up its balance sheet amid the worst U.S. housing downturn in decades, according to market sources looking at the deal.

A $2 billion convertible preferred offering was set to price at a dividend rate of 8.75 percent, which is at the tighter end of the range talked at 8.75 percent to 9.25 percent, the sources said. Ahead of the final pricing expected late Thursday night, the deal was drawing strong demand of three or four times the amount on offer.

Moreover, Fannie was expected to price $2 billion of common stock at $27.50 per share, a slight discount to its closing price on Thursday, according to these market sources.

Fannie shares closed down 4.89 percent at $27.63 on the New York Stock Exchange.

Fannie Mae declined to comment on the offerings.

The Fannie Mae deal comes on the heels of an offering by Citigroup earlier this week.

"When these deals come, appetite is strong and the deals get done and priced almost instantly," Michael Kastner, head of fixed income at Sterling Stamos Capital Management in New York, said before Fannie Mae's deal. "It's a sign the credit problem is resolving itself."

Fannie needs capital after posting three consecutive quarters of losses, and to meet the demands of the U.S. housing market after more than a year of soaring delinquencies and falling home prices.

Lawmakers and regulators have increased pressure on Fannie Mae and rival Freddie Mac (FRE.N: Quote, Profile, Research) to do more to stabilize the housing market, especially in a presidential election year.

The importance of the two government-sponsored enterprises and Ginnie Mae has increased as the credit crisis has choked off Wall Street mortgage funds that fueled the easy lending responsible for the industry's undoing.

Among other financial institutions also raising capital after mortgage-related batterings, Citigroup Inc (C.N: Quote, Profile, Research), the largest U.S. bank, on Tuesday sold $2 billion in non-cumulative perpetual preferred stock with a coupon of 8.5 percent.

Raising capital is Fannie Mae's part of a bargain with the Office of Federal Housing Enterprise Oversight to reduce an excess requirement assessed after an accounting scandal. OFHEO cut the excess capital required over the usual minimum in March to 20 percent from 30 percent, and intends to cut the level to 15 percent on its way to 10 percent by September.

Fannie Mae as of March held $42.7 billion in core capital, exceeding the minimum currently required by $5.1 billion.

The Washington-based company on Tuesday said it lost $2.5 billion in the first quarter, after preferred stock dividend payments, and said it could not predict when conditions would improve.

Steeper home price declines and foreclosure-related losses led it to boost its forecast for credit losses to its portfolio, to 13 basis points to 17 basis points from the 11 to 15 basis points range indicated in February.

Fannie Mae just raised a record $7 billion in capital in December, paying a fixed dividend of 8.25 percent for three years. Freddie Mac in November sold $6 billion in preferred stock at an 8.375 percent dividend for five years.

[HenryTo]

Spreads tightened significantly on Freddie Mac and Fannie Mae debt (note this is agency debt, not agency MBS - the former is backed by the agencies' balance sheets while the latter is backed by mortgages, which is implictly guaranteed by the US government).
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Fannie Mae, Freddie Mac credit spreads tighten
Tue Apr 1, 2008 1:24pm EDT

NEW YORK, April 1 (Reuters) - The cost of protecting debt of Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) with credit default swaps tumbled on Tuesday after strong demand for a share offering by Lehman Brothers (LEH.N: Quote, Profile, Research) lifted sentiment in the financial sector.

Five-year credit protection costs on Fannie Mae fell by 9 basis points to about 43.5 basis points, or $43,500 a year to protect $10 million of debt, while Freddie Mac's protection costs fell by about 8.5 basis points to about 43.5 basis points.

[HenryTo]

Fannie and Freddie set to raise more capital:

http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=FNM:US&sid=appJJafSJ1DY

[rffrydr]

Fannie Mae down 10%...trading like the govt. institution it is?
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

FYI:
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Federal home loan banks OK'd to buy more MBS

By Robert Schroeder
Last update: 10:43 a.m. EDT March 24, 2008

WASHINGTON (MarketWatch) -- The Federal Home Loan Banks were approved to buy more mortgage-backed securities on Monday. The purchases are limited to the securities of Fannie Mae and Freddie Mac. In a press release, the Federal Housing Finance Board said the expanded authority of the home loan banks could provide more than $100 billion in additional liquidity to the mortgage-backed securities market.