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Fannie and Freddie - what does the Future hold? |
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Here are a couple of bullet points from my research:
•· Fannie Mae and Freddie Mac are placed into conservator-ship immediately. This amounts to a government take-over of the two companies. |
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•· To promote market stability, the companies will be allowed to buy more mortgages through the end of 2009. However, starting in 2010 the number of mortgages they own will gradually be reduced at a rate of 10% per year, eventually stabilizing at a much lower size. This is big! It's unknown what the effect will be on the market at large since the job of Fannie and Freddie is to provide liquidity for origination of mortgages. An artificial reduction (not based on demand) of agency buying power means that other sources will provide the liquidity needed to satisfy origination demand. FHA is a likely candidate to absorb much of this market share but how much is impossible to say.
•· The US Treasury will ensure that each company maintains positive net worth by buying their stock as well as providing a new lending facility to serve as an "ultimate liquidity backstop." This facility will expire on December 31, 2009 according to reports. Whether the ‘backstop' really expires or not remains to be seen.
•· Monday morning, both agencies resumed normal business operations.
•· The U.S. government assumes control over the Board and management. DMV baby!
•· Current Fannie Mae and Freddie Mac CEOs are being replaced, but will stay on through a transition period.
•· There will be no dividends paid on preferred or common stock. This is incredibly important on several levels. First, imagine owning Fannie/Freddie in your retirement portfolio (if you have anything with PIMCO you probably own a lot of agency stock), learning that you'll not be receiving dividends on the stock is going to be tough. If you've been watching, you're aware that both Fannie and Freddie are trading at under .90 cents a share! The government is trying to assure shareholders that value will return once the government is no longer running the agencies but this leads me to the second reason that this takeover is important from a market at large perspective. Once an industry sector has experienced a government takeover (think Mexican oil rigs in the gulf during the 70's and 80's) the threat looms permanently. Sure, when the mortgage market recovers, Fannie and Freddie will again show profit, but it will never again be considered a safe bet. Fund investors looking for a stable place to park assets will always recall the takeover of 2008 when their stakes evaporated in a matter of weeks. It will be years before we see large capital investments in fannie, Freddie or any other GSE that may gain favor. Big stuff.
•· All lobbying/political activity by the companies will cease. This may seem like a good thing at first but consider that this means the MBA and NAR will have no input in the restructuring of our industries most important source of liquidity. It's enough to make you want to join the NRA.
So what does it all mean? In the short term these actions will provide stability to the market that many experts think will be the turning point in the housing crisis. We are seeing some implications of that already. Interest rates will continue to fall and there will be plenty of money for mortgage financing. I expect to see a mini refinance boom (more to come on that so stay tuned) as borrowers take advantage of rates we haven't seen for close to a year. There is no way to know how far they will fall, but one thing is for certain, when rates rise, it's faster than they fall so lock em if you got em. Remind borrowers who want to wait that Bears and Bulls both go to market but pigs just go to slaughter, so don't get greedy.
I've got more information on the subject if needed, so please feel free to contact me at any time.
Thanks, |
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