Fannie Mae yesterday won the competitive bidding on a $47 million Minnesota Housing Finance Agency issue, raising questions about competition between an agency with the implicit backing of the federal government and private municipal underwriters.
Since 1987, Fannie Mae has been active in structuring negotiated private placements for state housing agencies. But yesterday marked the first time the entity won a tax-exempt deal in a competitive bid.
In the bidding process, the government-sponsored entity officially called the Federal National Mortgage Association beat out private investment banks including groups led by PaineWebber Inc., Merrill Lynch & Co., and Goldman, Sachs & Co.
Fannie Mae won the Minnesota agency's issue of single-family mortgage bonds with a total interest cost of 6.4509%. The bonds are rated AA by Moody's Investors Service and mature from 1996 to 2004.
PaineWebber's cover bid for the offering was 6.5067%; the group led by Goldman Sachs bid 6.5118%; and Merrill Lynch bid 6.5456%, according to Alan Hans, senior vice president at Evensen Dodge Inc., the housing agency's financial adviser.
One housing bond analyst said that Fannie Mae's participation could upset the delicate balance of the singlefamily housing bond market.
"It's certain to increase the competition out there," said the analyst, speaking on the condition of anonymity. "Margins are very fight on the competitive side, and you have to wonder how some of these firms can make money. This competition [from Fannie Mae] doesn't help, but it's only one deal."
Members of the underwriting teams at PaineWebber, Merrill Lynch, and Goldman said they were not aware that Fannie Mae would be bidding on the transaction, but generally felt that "it doesn't happen often enough to worry about," as one investment banker said.
Fannie Mae is best known for purchasing mortgages from lenders and then selling its own securities backed by those assets. But the quasi-governmental entity is also one of the Street's biggest institutional buyers, with a portfolio of about $70 billion and assets from between $230 billion and $250 billion, according to market sources.
Some sources suggested that investment bankers might be reluctant to make "gratuitous comments" about Fannie Mae because of the business they do with the agency in other markets. Officials for the industry's trade groups were also reluctant to speak on the issue.
The industry's initial laissez-faire outlook on the developments might soon change, however, as Fannie Mae officials said they are looking to purchase more tax-exempt bonds through the competitive bidding process.
"In the future, we will look for other opportunities like this in which we can add value for the issuer to allow them to provide a lower cost of financing for first-time home buyers," said Jack Gallagher, vice president for public finance at Fannie Mae. "I suspect we will purchase this year somewhere between $750 million and $1 billion in tax-exempt securities."
Fannie Mae officials said the Minnesota bonds were purchased for the agency's own investment portfolio, and will not be resold.
"This is gone. They ate it. It's disappeared into the Fannie Mae black hole," one housing bond analyst said. "I don't know if it's a trend, but they're absorbing some supply."
Because Fannie Mae purchased the bonds for its own portfolio, there was no sales commission on the transaction, adding to the cost savings for the issuer, according to Robin Hanson, finance director for the Minnesota Housing Finance Agency.
"From a cost of capital standpoint, it's clearly in the agency's interest to get the lowest cost of funds, and Fannie Mae was able to provide that," Hanson said. "At the same time, we don't have to pay an underwriter's discount. It worked out very well for the agency."
