Tuesday, April 05, 2005

GSE Shake-Up In Progress

The mortgage landscape is changing and some leaks from Washington are giving us an idea of what's to come. "A senior administration official said on Tuesday, "We believe that our capital markets could adjust to a significant reduction in the presence of the housing GSEs (government-sponsored enterprises) as mortgage investors."

By that he means the GSE's will still bundle up the loans, just not hold them. But the US government will not be "implicitly" backstopping the mortgage backed securities(MBS). "He will say the lines of credit that GSE's enjoy should not be interpreted by the market as an 'implicit guarantee' that signals the federal government would back the companies' debt obligations."

So the big change is that those trillions of dollars of loans will have to stand on their own. But with Uncle Sugar gone, who will hold them now?

There is this little matter to be faced. "The White House remains troubled that Fannie and Freddie have not filed reliable financial statements. (The new) regulator should have the ability to..place a failed GSE in receivership if needed...(and) only seek to exercise the line of credit in the event that a GSE was in 'significant financial distress and needed the capital to emerge successfully through the receivership process.'"

14 Comments:

At 10:14 AM, Anonymous Anonymous said...

OMG !

As far as I can see, the FED is posturing itself for a collapse of the economy. Yesterday it changed the interest rate setup on treasury bonds to favor increasing interest rates.

Now Fannie isn't really going to do mortgages ???? WOW.

Who else would want to hold the debt of a sector that most financiers think is over valued ? I see the risk in mortgage based securities as being very high right now.

I think there is a huge shock forthcoming in the mortgage market.

This isn't a good time to be looking for private buyers to take over some or all of the mortgage financing.

 
At 10:27 AM, Blogger Ben Jones said...

(This isn't a good time to be looking for private buyers to take over some or all of the mortgage financing.)

Fannie and Freddie have been unloading the loans for months now. The spread is thin as it is, so the risk is hardly worth it.

 
At 10:34 AM, Anonymous Anonymous said...

Were those "gov't guaranteed" securities ?

Did they sell them as conventional bonds or special purpose vehicles ?

I can't seem to find any mortgage debt instruments for sale. Where are they sold and who is buying them ?

 
At 12:07 PM, Anonymous Anonymous said...

This company buys them and repackages them for consumers to buy:

http://www.sentryselect.com/it_MBS.html


Profile

Mortgage-Backed Securities Trust ("MBS Trust") invests, through a limited partnership, in a portfolio consisting primarily of AAA rated mortgage-backed securities issued by the U.S. agencies commonly known as Ginnie Mae, Fannie Mae and Freddie Mac. Mortgage-backed securities are essentially bonds that are secured by large pools of individual mortgages selected from the US$3 trillion mortgage market in the United States.

Objectives
* To provide holders of Units with a stream of monthly cash distributions in Canadian or U.S. dollars that, in any year, will be targeted to approximate the average 10-year U.S. Treasury Note yield for that year plus 3.50%; and

*To preserve the net asset value of the Trust.

* The Trust purchases primarily AAA rated mortgage-backed securities issued by the U.S. agencies commonly known as Ginnie Mae, Fannie Mae and Freddie Mac with the equity of the Trust in addition to borrowings from reverse repurchase agreements.


* The Trust than generates net income for distribution from the spread between the interest income on its securities and the cost of the reverse repurchase agreements used to finance the acquisition of such securities.

Investment Manager

* The Trust is managed by FIDAC, the Fixed Income Discount Advisory Company which currently manages more than US$27 billion in gross assets and has a successful record of generating positive interest rate spreads in a wide range of interest rate environments. FIDAC>>

Leverage

* MBS Trust enters into repurchase agreements with various major financial institutions in order to effect short-term borrowings for the purpose of making investments and to pledge its assets to secure such borrowings.


* The Trust operates with a debt-to-equity ratio of between 7:1 and 12:1.

...
Liquidity

* Units trade on the Toronto Stock Exchange under the symbols MF.UN (C$) and MF.U (US$)

* Unitholders may redeem Units on the March valuation date of each year at a price equal to 100% of the net asset value per unit on the valuation date, beginning in March 2004; and

* By exercising the Demand Redemption Right, Units are redeemable at any time on demand by the unitholders at a price per unit equal to the lesser of (i) 90% of the market price per unit during a 10-trading-day period and (ii) 100% of the closing market price on the Redemption Date.

Mandatory Market Purchase Program

* The Trust will purchase Units in the open market if they trade at a discount greater than 95% of NAV, subject to some limitations.



So... by some finanical magic, home owners get a mortgage at FED rates and yet this company presumably makes a profit as well as generating a return of FED + 3.5%. WOW. Apparently this company has found a way to manufacture profits out of nothing.

I like the (up to) 12:1 debt to equity ratio as well as that they (almost !) guarantee the buyer the net asset value back. I wonder if the net asset value of the security changes if the people default on their mortgages. Note that they used "net asset value" and not "purchase price"

 
At 12:14 PM, Blogger Ben Jones said...

(This company buys them and repackages them for consumers to buy)
Anon,
Thanks for the link and info. It is a big help..Ben

 
At 12:34 PM, Anonymous Anonymous said...

It is not clear to me if the mortgage backed securities mentioned above for sale to the consumer are guaranteed by FNM to the customer or to the company ?

Does anyone know ?

Also: it is interesting that the company in the link hasn't posted its 4rth quarter 2004 financials. The 3rd quarter report is there, but not the 4rth... I wonder if this is one of the "thousands" of special purpose vehicles (trusts) that FNM does not have on their balance sheet.

Whenever I see one of these "trading makes a big profit for doing nothing" investments I run away far and fast. I'd like to know how all of the following happen at the same time:

a) consumer gets a mortgage (ARM or otherwise) at very low rates.

b) FNM makes a profit and guarantees the mortgage backed securities

c) the issuing company makes a profit

d) the purchaser gets a return of 10yr Fed + 3.5%.

Hmmm... I suspect there is a bit of financial magic going on here. I'll bet there is a lot of hedge fund activity going on behind the scenes. It might be advertised as a mortgage backed security, but the key word is backed.

This is very interesting.

The whole housing industry appears to be a house of cards situation. Throwing GM's problems into the situation is like turning on a fan and shaking the table.

 
At 3:01 PM, Blogger John Law said...

I wonder if those MBS are really AAA quality.

 
At 3:26 PM, Anonymous Anonymous said...

I wonder if those MBS are really AAA quality.

I wonder that too ! How can a security that is based on the cash flow of a highly leveraged consumer about to become cash strapped due to inflation, energy costs, rising interest rates and possible employment cutbacks, backed by an over priced asset that is about to undergo significant depreciation be rated AAA ?

When I started reading this blog, I thought a housing bubble was possible but not probable. Now I think it is unavoidable. The whole situation is set to collapse.

I wonder how that "95% return of net asset value" works for the MBS holder, especially when the market falls apart and people walk away from their houses. I wonder how much the work the selling institution, FNM and the retailing institution are going to put into recovering "net asset value" for the MBS owner ? Is recovering houses a profitable as financing them in the first place ?

 
At 4:45 PM, Blogger Ben Jones said...

Excellent comments today, thanks everybody!

(it is interesting that the company in the link hasn't posted its 4rth quarter 2004 financials)

Any other company would be facing delisting. It is a sign of how serious the situation is. The board has not helped matters.

(I wonder if those MBS are really AAA quality.)
If you read Fitch and Moodys carefully, they say that entirely hinges on "implied" US government backing. In other words, without Uncle Sam, no. That is why the pending legislation will matter so much to the credit markets. There are trillions of $ in MBS.

(Is recovering houses a profitable as financing them in the first place ?)
If you remember the S&L debaucle, it obviously isn't. The government had to create a corporation just to hold the homes. No bank, or anybody else for that matter, could afford to sit on them while the market sorted out.

 
At 6:04 PM, Anonymous dry fly said...

When I read things like this I want to pour a big tall glass of kool aid... gag... ack... pfft!

*plonk*

 
At 6:17 PM, Anonymous dry fly said...

If you remember the S&L debaucle, it obviously isn't. The government had to create a corporation just to hold the homes. No bank, or anybody else for that matter, could afford to sit on them while the market sorted out.

*****************

Hell they couldn't sell them either - the forced auctions of foreclosed properties were driving down the rest of the market so hard and fast... the bankruptcy courts wouldn't be able to process them... They couldn't hold them, they couldn't sell them... it was a nightmare.

But if you had cash baby, if you had cash... two anecdotes:

(1) I fly fish... hence 'dry fly'... I was on a stream in S Minnesota circa 1986-87 and met an old farmer... we talked about fishing and retirement and such... he told me he had just bought property in N Minnesota overlooking Lk Superior with a top trout stream through it... a beautiful new nome less than five years old, 3 bdrm 2 ba, etc., on five acres of and woods and streams and a beautiful walk out view of Lake Superior...

He had not intended to buy it but was fishing the stream, noticed there was a 'closed bid blind auction' and he decided to take a shot... His bid?


$8,000.

 
At 7:15 PM, Blogger John Law said...

I think I remember this from this interview of doug noland. he said a lot of the ABS or MBS may have more risk than people think because they package up loans using derivatives to get a AAA rating.

this interview is about an hour long.
http://www.netcastdaily.com/1experts/2004/exp042404.mp3

 
At 7:46 PM, Blogger Ben Jones said...

(closed bid blind auction' and he decided to take a shot... His bid? 8,000.)
Thats the kind of opportunity I will be looking for when this goes south...Ben

 
At 8:21 PM, Anonymous dry fly said...

The other anecdote (got pulled away - and couldn't finish)...

(2) A property came up for sale near me about the same time... a 500 acre dairy farm with almost a mile of Class A trout stream, loaded with wild browns, running through the middle of it... a 4 br 1900 'Prairie Square' farmhouse in good shape, barns and other out buildings. The land comprised a 100 acres pasture, 150 acres mature hardwoods - mostly oak - and 250 acres corn (with about a 160 bushel per acre base)... All tucked away into a valley about an hour SE of the Twin Cities (commutable distance to southern suburbs)... and about 10 minutes drive to the Mississippi...

The farmer who owned it was retiring and refused to give it to his son... after the heartache of the 80s ag crisis... he wanted his son to have something valuable - money - and not something almost worthless like land.

He was asking only $240K for the WHOLE THING... and not getting offers. A friend of mine offered $200K to buy it via 'contract for deed' but he was a construction worker and unemployed half the time... bad risk.

I thought about buying it but my business was up and down and corn was only $1/bu or so at the time... and interest rates were still 8-9%... I couldn't be sure looking forward then that I could carry it...

In the end he gave it to his son anyway... who still farms it.

That was about 1987-1988... last year a similar piece of land in a town not too far away sold to developers for about $15 million...

 

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