WALL STREET – Sunday’s federal takeover of Fannie Mae and Freddie Mac had immediate benefits for credit unions and other institutional investors as there was a massive rally in the price of mortgage securities yesterday.
Yesterday’s rally was due to a narrowing in the spreads between so-called agency bonds, those issued by Fannie and Freddie, and U.S. Treasuries, as the government takeover appeared to investors to eliminate the risk of repayment by the two secondary mortgage market giants, according to market participants.
The prospects of credit unions and other debtholders stood in stark contrast to those of equity holders, those who own common or preferred stock in Fannie and Freddie, whose value is expected to be wiped out as part of the government takeover, likened to a Chapter 11 bankruptcy proceeding. As a result, common shares in the two companies plunged below $1 each yesterday, even as the stock markets soared in the belief that Sunday’s federal takeover of the two will brace the mortgage markets.
The market opened yesterday with a tightening of spreads on agency bonds of approximately 40 basis points, with prices for Fannie and Freddie issues moving sharply higher, according to Christopher Sullivan, chief financial officer for United Nations FCU.
“This is good for credit unions and other holders of those securities because the prices have moved up so much. That means pretty significant gains for their holdings,” Sullivan told The Credit Union Journal yesterday.
Prices for Fannie and Freddie issues, very popular among credit unions, have fallen steeply in recent months, sharply reducing the value of those investments on credit union balance sheets. Some of the biggest credit union holders of mortgage securities, the corporate credit unions, have reported large losses in the market value of those securities, much of it issued by Fannie or Freddie.
The threat of a Fannie or Freddie failure in recent weeks has also caused investors to shy away from the huge debt offerings with which the two companies finance the purchase and sale of mortgages, drawing liquidity from the secondary market that finances the nation’s mortgage finance. This week’s federal takeover of the two mortgage giants was aimed at stemming that liquidity drain by removing questions one may default on its debt.
“The plan is working as planned,” said Ray Amereno, managing director at credit union bond house First Empire Securities.
Amereno said the government takeover has redefined the risk in government sponsored enterprise debt, so that bonds issued by Fannie or Freddie are not much more risky than those issued by Ginnie Mae, which are explicitly guaranteed by the federal government. “It (Fannie and Freddie debt) is not federally guaranteed at this point, but it’s as close as you can get,” he said.
“This takes away a huge uncertainty,” said CUNA Chief Economist Bill Hampel, who is confident by bolstering the mortgage securities market the federal takeover will ease mortgage rates. “This will lower mortgage rates, of course,”
Credit unions hold almost $77 billion of debt issued by one of the GSEs; perhaps as much as $60 billion issued by either Fannie or Freddie. According to NCUA, federally insured credit unions are barred from investing in Fannie or Freddie common or preferred stock, but may invest in senior debt, subordinated debt and mortgage backed securities issued by one of the two entities.
