A Treasury bailout of Fannie and Freddie is all but a foregone conclusion, you might assume.
Kick-started by Barron’s Sunday report, there has been a steady drip-drip of information about sentiment at the US Treasury vis-a-vis the mortgage giants.
From jawboning we’ve come to bailing out.
Shares in both FNM and FRE have, accordingly, taken a pasting: down 44 per cent each this week. Though as Felix Salmon at Market Movers notes,
…the shares are so cheap at this point that even a relatively modest fluctuation of less than 80 cents in the Freddie share price will hit the headlines as a 20% move.
There has already been plenty of broad discussion about Fannie and Freddie’s solvency position. Yves Smith at Naked Capitalism points out that Nouriel Roubini was questioning their viability two years ago. For a more recent overview, John Hempton of the Bronte Capital blog, gave an excellent three part dissection of Fannie Mae.
So much for the story so far.
The latest hit of bad news this week - “jawboning” aside - concerns the upcoming spike in debt due for refinancing facing both FNM and FRE: $225bn before September, reported the WSJ on Wednesday. A question on which the fate of both institutions “hinges”.
Failure to refinance would be an immediate signal to the Treasury to step in; it would force its hand. Mish Shedlock notes that $225bn is an awful lot to try to sell right now, no matter how creditworthy the institution:
There is a decent chance the bond market chokes on those rollovers. That is one reason why Paulson asked for a blank check to buy unlimited amounts of Fannie and Freddie bonds.
But as Yves Smith observes, “everything can be solved by price”. Fannie and Freddie may well be able to roll if they pay enough.
And here we get to the real issue facing both institutions. The price of doing the business they do.
Freddie placed a $3bn bond issue on Tuesday. Hoping to send out a signal, perhaps, that it could still raise money. It certainly didn’t do it because it was economical to do so. The bond priced with a spread of 113bps over Treasuries. Compare that to 69bps two months ago.
Freddie spokeswoman Sharon McHale told Bloomberg that:
[Freddie Mac] continues to have strong access to the debt markets at attractive spreads.
It’s unclear whether Ms Hale has ever visited the planet Earth.
Fannie and Freddie might well, short term, be able to afford payments on that debt. But the way they do so is by effectively passing on its cost to the US mortgage market. As the WSJ’s Heard on the Street column noted:
The rate on a standard 30-year mortgage is currently 6.52%
Exactly where it was a year ago - in August.
Fannie and Freddie aren’t working - and the US Treasury knows it. If a bailout comes, it won’t necessarily be for the sake of the institutions, but for the US mortgage market. On Wednesday, the Treasury’s public stance shifted notably. A spokesperson told the FT that the department was
“vigilantly” monitoring market developments and was (emphasis ours).
…focused on efforts that will encourage market stability, mortgage availability and protecting the taxpayer.
Both institutions could be extremely well-capitalised and happy as larry, but they would still be failing to do that.
Ensuring the equitable functioning of the US mortgage market for the US taxpayer - not merely returning money to their shareholders - is their especial purpose.
Related links
A history of Fannie Mae and Freddie Mac - FT
It doesn’t look good for Bill Miller - FT Alphaville
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