Tag Archive: fannie mae


Relative yields on mortgage-backed securities that guide new loan rates have fallen to the lowest in five months as investors wager the Federal Reserve is on standby to expand its holdings if the U.S. economy or Europe’s debt crisis worsens.

Yields on Fannie Mae’s current-coupon, 30-year bonds ended last week at 94 basis points more than 10-year Treasuries, the narrowest since July 8, according to data compiled by Bloomberg. The spread widened to 98 basis points yesterday after reaching 121 basis points, or 1.21 percentage points, on Nov. 24.

The Fed is already bolstering the market, adding "dollar roll" trades this month that lower financing costs for investors, after starting in October to recycle proceeds from past investments in housing-related debt to help real estate escape its worst slump since the 1930s. While a smaller share of economists predict the central bank will add to its $1 trillion of holdings as the U.S. grows, bond buyers may benefit regardless, said Dwight Asset Management Co.’s Paul Norris.

"Let’s say that something bad happens in Europe," said Norris, a senior money manager whose Burlington, Vermont-based firm oversees about $50 billion. "Initially mortgages may widen out a bit but what that would likely lead to is a really quick implementation of QE3," he said, referring to what would be the third round of Fed asset purchases called quantitative easing.

If the situation is reversed and "Europe gets its act together," benchmark interest rates would probably rise, benefiting mortgage-bonds spreads partly by reducing refinancing and the supply of new securities, Norris said.

Economists Forecast

While Federal Reserve Vice Chairman Janet Yellen, Governor Daniel Tarullo and Fed Bank of New York President William C. Dudley have signaled more mortgage-bond purchases are possible, economists say it’s growing less likely.

About 49 percent surveyed by Bloomberg News see the Fed announcing next year additional debt buying, down from more than two-thirds before the central bank’s November meeting. The Federal Open Market Committee meets today in Washington. Money managers are "overweight" on agency mortgage bonds by the most in at least two years, according to JPMorgan Chase & Co.

Elsewhere in credit markets, Caterpillar Inc. sold $600 million of bonds after the cost to protect the debt of the world’s largest construction and mining-equipment maker rose to the highest level in more than two years. U.S. interest-rate swap spreads widened as Moody’s Investors Service and Fitch Ratings said Europe’s leaders did little last week to fix the region’s debt crisis. Blue Coat Systems Inc. sought $465 million in loans as prices fell for a fourth day.

Caterpillar Swaps

Bonds of Charlotte, North Carolina-based Bank of America Corp. were the most actively traded U.S. corporate securities by dealers yesterday, with 77 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Caterpillar’s offering consisted of $400 million of 1.125 percent notes due in December 2014 that yield 85 basis points more than similar-maturity Treasuries and $200 million of two- year, floating-rate debt that pays 30 basis points more than the London interbank offered rate, Bloomberg data show.

Credit-default swaps on Peoria, Illinois-based Caterpillar’s debt traded yesterday at 149.3 basis points, the highest since July 2009 and up from 118.5 at the end of October, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately- negotiated market.

Markit CDX Index

Benchmark gauges of company credit risk in U.S. and Europe rose after Moody’s said a European Union summit offered few new measures and doesn’t diminish the risk of credit downgrades on European nations. Fitch said a comprehensive solution hasn’t yet been offered and predicted a "significant economic downturn" in the region.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 3.5 basis points to a mid- price of 125.4 in New York, according to data provider CMA. The gauge has climbed from 79 on Feb. 8.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 1.5 basis points to 184.25, according to JPMorgan at 11 a.m. in London.

Risk Gauges

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield increased 1.54 basis points to 43.93 basis points, the widest since Dec. 2. The measure, which rises when investors favor government bonds, has expanded from 41.55 on Nov. 30.

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index fell 0.3 cent to 90.39 cents on the dollar, the lowest level since Nov. 29. The measure, which tracks the 100 largest dollar- denominated first-lien leveraged loans, has declined from 90.83 on Dec. 6.

Blue Coat, a provider of web security solutions, is seeking funding to back its buyout by Thoma Bravo LLC. The financing will include a $415 million term loan and a $50 million revolving line of credit, according to a Dec. 9 regulatory filing. Investment bank Jefferies Group Inc. is arranging the financing for the Sunnyvale, California-based company.

Emerging Markets

Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.

In emerging markets, relative yields rose for a second day, up 1 basis point to 409 basis points as of 10:08 a.m. in Hong Kong, according to JPMorgan’s EMBI Global index. The measure has ranged this year from 259 on Jan. 5 to 496 on Oct. 4.

The Fed, which under QE1 bought $1.25 trillion of mortgage securities and $172 billion of other agency debt through March 2010, has purchased a net $56.1 billion since October to offset prepayments and maturities, Bloomberg data show. The acquisitions are focused on the $5.3 trillion market of home- loan bonds guaranteed by government-supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae.

Anticipation of more transactions may be boosting demand among private investors. About 64 percent of money managers surveyed by JPMorgan are "overweight" agency mortgage securities, or holding a greater percentage than found in benchmark indexes, the highest since at least mid-2009, according to a Dec. 9 report by the New York-based bank.

QE3 Potential

Because of the potential for QE3, government-backed mortgage securities "offer that rare beast: positive exposure to event risk," Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, wrote in a Dec. 7 report. He recommended the bonds over other debt "within the interest rate sphere," such as Treasuries, in his 2012 outlook.

Chairman Ben S. Bernanke and his fellow policy makers will start another QE program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last month. The Fed may buy about $545 billion in home-loan debt, based on the median of the firms that provided estimates.

A majority of 51 percent of the 41 economists polled by Bloomberg from Dec. 7 through Dec. 9 said the central bank will refrain from QE3. That contrasts with a survey before the Fed’s November meeting that showed 69 percent forecasting the action. This month, 13 percent of the economists said they expect the move will be announced in January and 21 percent in March.

Jobless Rate Falls

The likelihood has fallen after the unemployment rate declined to 8.6 percent from 9.1 percent, U.S. manufacturing expanded at the fastest pace in 5 months and vehicle sales climbed to their highest level in over 2 years.

A program may include $700 billion of home-loan securities, Citigroup Inc. analysts said. That figure reflects how much would be needed to "tangibly influence" mortgage rates without disrupting functioning in the market, analysts Inger Daniels and Mayank Singhal wrote in the Dec. 9 report.

Tarullo, in an October speech, said additional mortgage- bond purchases should "move back up toward the top of the list of options" because "the aggregate-demand effect should be felt not just in new-home purchases, but also in the added purchasing power of existing homeowners who are able to refinance."

Dollar Rolls

Yellen said in a Nov. 29 speech that she sees "see a strong case for additional policies to foster more-rapid recovery in the housing sector." If the Fed opted to buy more bonds, "it might make sense" for much of those to consist of mortgage securities to boost the housing market, Dudley said Nov. 17.

During the week ended Dec. 7, the Fed engaged in $4.35 billion of paired purchases and sales of mortgage securities in different months for the first time since starting to reinvest in the market along with its "Operation Twist" for Treasuries.

Those so-called dollar rolls boosted mortgage bonds last week, JPMorgan analysts led by Matt Jozoff and Morgan Stanley analysts Vipul Jain, Janaki Rao and Zofia Koscielniak said. The implied cost of financing Fannie Mae 3.5 percent bonds, which had climbed in a few weeks from about 30 basis points to almost 50 basis points, retraced that advance, according to JPMorgan.

Financing Rates

"Although funding markets in MBS have not shown significant signs of stress, financing rates have gone up in tandem with other funding rates, especially around year-end, and the Fed action helps alleviate some of those pressures," the Morgan Stanley analysts wrote in a Dec. 9 report.

With dollar rolls, an investor seeking to borrow money enters into contracts to sell mortgage securities in any month and then buy similar bonds the following month; a lender would undertake the opposite trades. Investors entering into transactions for other reasons may be on either side of the contracts.

The transactions will "facilitate the settlement of our outstanding MBS purchases," Jonathan Freed, a New York Fed spokesman, said in a Dec. 6 e-mailed statement.

The Fed’s use of the trades underscored the central bank’s commitment to supporting the market, Dwight Asset’s Norris said. "All of their speeches that I’ve read and all of the anecdotal evidence points to them being fully involved," he said.

While the central bank probably isn’t ready to announce additional mortgage-bond buying, it may provide new aid to the market if it details changes to its so-called communication strategy in a way that reduces expected interest-rate volatility, he added. Higher forecasted volatility damages investors by increasing doubt about when the debt will be repaid as projected homeowner refinancing fluctuates and by boosting hedging costs.

 

 

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Approach to spread credit risk is based on Freddie multi-family securitizations

By Ronald D. Orol, MarketWatch

A proposal floated by the Obama administration and Freddie Mac to induce private mortgage investors back into the single-family loan industry likely would need to offer double-digit yields to entice buyers, analysts say.

The approach, which is still in the conceptual study phase, would have Freddie Mac and Fannie Mae, the two government-seized mortgage giants, sell single family mortgage securitizations of which a small slice — 5% or 10% — would be sold without a government guarantee. Investors buying the subordinated security would be the first to take a loss if mortgages in the package default. To attract these investors, Freddie and Fannie would need to offer a higher yield.

“Because there is still a lot of risk aversion in the market and people are still reluctant to put capital to work right now, they would need to be offered 10% or even higher yields to buy unguaranteed securities,” said Chris Flanagan, head of U.S. mortgage and structured finance research at Bank of America Merrill Lynch.

“There are people out there who are willing to do that sort of investing, not as many as those who would buy the guaranteed securities, but there are people who know mortgage credit well and would buy it for a 10% or greater yield,” he added

Regulators are considering the approach because of the success of an existing program that Freddie Mac has employed to sell some multi-family mortgage securities without a government guarantee.

The goal of the new approach would be to begin the process of defrosting the private-label single-family mortgage securities market, which has been all but frozen and unable to function since the financial crisis of 2008.

Outgoing Freddie Mac CEO Charles Haldeman said Oct. 11 at a Mortgage Bankers Association conference in Chicago that he hopes to use the firm’s multi-family mortgage securitizations as a template for attracting private capital to the single-family mortgage securities market.

Freddie Mac has completed 17 of these multi-family securitizations since June 2009 with a value of $18.7 billion, of which $16.4 billion was guaranteed and $2.3 billion carried no government guarantee.

David Brickman, senior vice president for multi-family mortgages at Freddie Mac, said the mortgage giant has had strong demand with multi-family securitizations, in part, because investors have seen extremely low delinquency rates with only 0.3% with the loans defaulting on average.

“We’ve had one of the best portfolios in the industry and the lowest delinquency rates on our multi-family loans,” Brickman said.

He noted that the subordinate slice of the securitization that is not guaranteed by Freddie comes with a much higher yield in the “teens”and that investors in those securities who specialize in these apartment securities really understand the investments. Freddie Mac now has a list of roughly 100 potential buyers for the ‘securitizations’, Brickman said.

“The folks who invest in that [subordinated un-guaranteed] class are given a substantial amount of property-level information to help them assess the investment and they frequently visit the properties in the pool. The yields on those are typically in the teens,” he said. “They are frequently real estate investors and private equity funds who look for that high yield.”

He noted that some of the slightly less subordinate unsecured, mezzanine, bonds typically come with a 5% to 6% yield and are often purchased by insurance companies, hedge funds and some high-yield funds managed by conventional money managers.

Mike McMahon, managing director at Redwood Trust Inc., a publicly traded real estate investment trust, said buyers would come for the unguaranteed tranches if yields are high enough.

“If mortgage credit investors are persuaded that the collateral is clean and it is well underwritten and provides an equity-like return, then there will be a lot of buyers,” said McMahon.

Since the crisis began Redwood has come to the market with three private-label residential mortgage-backed securities transactions, in sizes of $238 million, $295 million and $375 million, respectively.

Manoj Singh, formerly senior vice president of pricing and securitization at Freddie Mac, says investors are willing to take the credit risk on new single-family mortgage securities for a high yield because these loans are typically made with tight underwriting standards and will have low default rates.

“These securitizations will be made up of new originations from borrowers with pristine credit, high credit scores, and high-yield investors will be willing to take that risk,” said Singh. “The interest rate they receive will be a few percentage points above the securities with a guarantee.”

Flanagan said default rates will not be as low as with the multi-family securities, but they will still be low. He points out that high-yield investors would be interested in buying some of these unguaranteed securities for such a high yield because traditional guaranteed mortgages securities are offering such a low yield.

“In today’s environment, there is no yield left in easy, liquid government securities,” Flanagan said.

Flanagan said that Fannie and Freddie will need to ease into such a new securitization market carefully and probably only issue roughly $10 billion in unguaranteed securities a year at the beginning, a small piece of the total mortgage market. Fannie and Freddie own roughly $1.4 trillion in mortgages and mortgage-backed securities, as of June, according to the agency.

Ajay Rajadhyaksha, chief of U.S. fixed income research at Barclays Capital in New York, in September told senators at a banking committee hearing that such an approach would work. He said the new securitizations would be critical to revive the stagnating private mortgage market because they would create a price for private mortgage securities, driving investment.

“The single most important reason to sell Freddie and Fannie credit risk is to establish a benchmark against which the private sector can price mortgage credit,” Rajadhyaksha said. “At the very least, investors would be able to have a better sense of what they should be paying for new purchases in the private label mortgage markets, encouraging primary issuance.”

Bose George, analyst at Keefe, Bruyette & Woods in New York, said that creating these kinds of securitizations could help revive the private mortgage market in the near term, while other efforts to do so, such as sweeping restructuring of Fannie Mae and Freddie Mac, will take years.

“Even if it is a modest program it will be putting some private capital into the mortgage market rather than waiting for Fannie and Freddie reform which will take much more time,” George said.

 

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