WASHINGTON - Credit unions were dipping their feet back into the secondary mortgage markets last week after the federal government takeover of financially troubled Fannie Mae and Freddie Mac, while prospects for billions of dollars in credit union investments in the two companies were brightening.
"What's going to happen is already starting to happen and that is we're getting better pricing for our members," said John Katalinich, chief lending officer for Inova FCU. Katalinich quickly took advantage of the market uptick and ended a months-long absence in the market by selling $10.5 million of mortgages, about 150 loans, to Freddie Mac, the day after the government takeover.
Faced with spiraling losses in the two government sponsored enterprises, the center of the huge secondary mortgage market, the government took the two companies under conservatorship on a Sunday while the markets rested. The government takeover came as the two companies, which buy as much as half of all residential mortgages made in the U.S., continue to hemorrhage red ink-more than $14 billion of losses over the last year, with more expected in the coming months.
Under The Conservatorship
Under the conservatorship, likened to a reorganization under Chapter 11 bankruptcy, the government ousted the top executives of the two companies and virtually guaranteed the trillions of dollars in debt-billions held by credit unions-issued by Fannie and Freddie.
The result was a short-term spike in pricing on the debt-credit unions hold an estimated $60 billion in Fannie and Freddie bonds - which immediately boosted credit union balance sheets by lifting the value of their investments.
"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," said Christopher Sullivan, chief financial officer for United Nations FCU, who manages more than $1.3 billion of investments.
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, especially a handful of corporate credit unions, have reported large losses in the market value of those securities, much it issued by Fannie or Freddie. The boost in value for Fannie- and Freddie-issued mortgage securities also helped lift values of so-called private label mortgage issues, those sold by other entities, further enhancing balance sheets.
"The plan is working as planned," said Ray Amereno, managing director at credit union bond house First Empire Securities. He said the federal 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's (Fannie and Freddie debt) not federally guaranteed at this point, but it's as close as you can get," said Amareno.
The prospects of credit unions, which are prohibited from holding stock, provided a stark contrast to many banks, who watched the value of their common and preferred stock in Fannie and Freddie plunge to near zero last week. As in Chapter 11 proceedings, the equity holders of the two companies are expected to be wiped out completely.
Citgroup indicated it could take as much as a $450 million hit; Wells Fargo $480 million and JP Morgan Chase more than $1 billion, from the wipeout of the Fannie and Freddie shares. PNC said it has an $80 million exposure; Astoria Financial $120 million and First National Bank of Jeffersonville (New York) $5 million, as an example of the wreckage caused by the federal takeover.
Just as important, the federal takeover was expected to ease liquidity in the secondary markets, where fear over a Fannie or Freddie failure have spooked investors in recent months, drying up liquidity. The replacement of an implicit government backing of Fannie and Freddie with an explicit backing helped the mortgage backed securities markets to rally vigorously, promising new availability for mortgage lending.
"This takes away a huge uncertainty," said CUNA Chief Economist Bill Hampel, who is confident that by bolstering the mortgage securities market the federal takeover will ease mortgage rates.
"What happened at Fannie Mae and Freddie Mac over the weekend was a positive thing for consumers; people who are thinking about buying a home and people who are buying a home," said David Motley, president of CU Members Mortgage, a division of Colonial Savings that provides mortgage services for almost 900 credit unions. By shoring up the two mortgage giants, the federal government has lowered the prices on mortgage securities, allowing credit unions and other lenders to pass on the benefits to borrowers, he said. He estimated that the rates on 30-year mortgages dropped from three-eighths or a point to half-a-point. "That's big, that's huge," said Motley.
The Scarce Liquidity
The scarce liquidity in the market has affected mortgage lending because the secondary market allows credit unions and banks to sell their mortgages and use the proceeds for additional funding to make more loans. Credit unions sell about a third of their mortgages on the secondary market, most of them to Fannie or Freddie, according to CUNA.
The huge losses at both companies have severely restricted their capital at a time the confidence in the secondary (mortgage securities) market has dried up, thus limiting their purchases of mortgages from credit unions and banks.
"The only secondary market that is viable these days is that which can be sold to Fannie Mae or Freddie Mac or Ginnie Mae," said Motley. "Now you're going to see Fannie Mae and Freddie Mac buying more mortgages."
The two companies, little understood by the public, are deeply interwoven into the fabric of the mortgage market, especially the credit union industry. So much so that Freddie Mac has a business affinity relationship with CUNA in which CUNA promotes its services to credit unions, and Fannie Mae has a similar relationship with NAFCU.
Market participants were hoping the government takeover will prompt one or both of the companies to reconsider surcharges assessed recently on mortgage purchases, known as adverse market charges. The charges were first assessed in December at 0.25%, then doubled last month to 0.50%, lowering the income on mortgage sales, and forcing credit unions to pass on the surcharges to members.
"From what I've read," said Claire Ippoliti, chief lending officer for Philadelphia FCU, "we should see some of these price bumps go down."
Inova FCU's Katalinich, who sat on Freddie Mac's advisory committee for four years, said his credit union and others have been driven from the secondary market because of the surcharges-which they must pass on to members-and because of tight liquidity in the markets, which lowered the pricing on the mortgages.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
