WALL STREET – The buzz around credit unions yesterday – after the federal government moved to backstop Fannie Mae and Freddie Mac – was that a guarantee of the two secondary mortgage market giants no longer is implied, but now a given, permanently changing the dynamics of the huge mortgage-backed securities market.
“Instead of it being an urban legend, we now know it’s true,” Steve Brewer, chief financial officer for Michigan Schools & Government CU, said yesterday, of the implications the federal government always stood behind the government sponsored enterprises.
He was referring to actions announced Sunday that not only will give the two mortgage giants access to the Federal Reserve’s discount window for low-interest loans but also would, if approved by Congress, raise the guaranteed lines of credit with the Federal Finance Bank and allow the federal government to buy stock in the companies to help shore them up.
For years, Fannie and Freddie’s $2.5 billion guaranteed line of credit provided an “implied” government guarantee, allowing the two companies to borrow more cheaply on the capital markets, while at the same time allowing them to claim a higher premium in the sale of debt over other corporate entities on the mortgage market.
The government actions, according to Christopher Sullivan, chief financial officer for United Nations FCU, amount to an effective 100% federal guarantee on Fannie Mae and Freddie Mac debt, which has become popular among credit unions over the past five years.
“Without that implicit guarantee now we’re getting closer to the full faith and credit (of the federal government) and we’re on pretty good footing,” said Brian Turner, director of Southwest Corporate Investment Services, a CUSO of Southwest Corporate FCU.
With establishment of more definitive government backing, spreads between agency securities can be expected to narrow, according to Brewer. That is what happened Friday, on rumors of pending government action, and yesterday, after the plans were announced.
Moreover, government actions are expected to eliminate some of the unrealized losses some credit unions have been recording on their Fannie and Freddie securities held for sale or trading over the last few months, observers agreed.
In theory, the spread between agency securities and Treasuries should continue to narrow as the government guarantees are enacted. “What will be the incentives to go to agencies now,” Brewer wondered to The Credit Union Journal.
