Unthinkable: GSEs in Literal Freefall

Both Fannie Mae (FNM) and Freddie Mac (FRE) led a broader downturn in the financial market Friday, as investors continued to grapple with what some analysts said appeared to be an ever-nearer bailout of the housing financial giants. Shares in Freddie were at $4.54, down $3.46 — a whopping 43.25 percent drop from Thursday’s already depressing close — by 9:59am EST; Fannie Mae wasn’t faring much better at $8.44, down $4.76, or 36.06 percent. Both GSEs saw share prices dip more than 50 percent in pre-market trading before rebounding slightly after market open. Read those numbers again, if you work in the mortgage industry. They’re for real. The seemingly continuing and endless freefall in both government-sponsored enterprises comes as published reports Friday morning suggested that government officials are weighing plan to place both GSEs into conservatorship should their problems continue. The New York Times reported on the progressing government plan and said that the shares of both GSEs would be worth little to nothing in such a scenario. In this sort of market, that sort of suggestion was clearly enough to become a self-fulfilling prophecy of sorts. Mortgage-backed securities markets, which had held tight in recent days despite the paranoia in the equity and debt markets over the GSEs futures, appeared to have capitulated in part Friday morning as well. Prices on agency mortgage bonds jumped sharply in early trades as traders apparently began jumping out of Treasuries — the the benchmark 10-year Treasury note was trading in dollar terms at $100.28 by 9:50am EST, a 28 basis-point drop from yesterday’s close. Meanwhile, prices on Fannie Mae’s current-coupon, 30-year fixed-rate bonds had soared Friday morning, up 31 basis points to $101.53. The stark downward movement in agency mortgage bond yields (note: yields move in opposite direction to bond prices) has pummeled agency mortgage REITs in recent days. In early Friday morning trading, shares in Annaly Capital Management, Inc. (NLY) stood at $13.29 on the New York Stock Exchange, down 1.92 percent; MFA Mortgage Investments, Inc. (MFA) shares were up slightly to $5.90, after being beaten Wednesday and Thursday by investors. Part of the problem facing the GSEs is a growing dilemma over mortgage insurers, which have seen their own financial fortunes fall in recent weeks; the GSEs could limit their forward exposure to the insurers by refusing future business from them, but so doing would damage the already frail financial condition of many MI providers — putting the GSEs in the position of potentially having to assume greater liability for the insured mortgages on their books. Yesterday, Office of Federal Housing Enterprise Oversight director James Lockhart reiterated his stance that both GSEs are adequately capitalized. “As I have said before, they are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums,” he said in a press statement. “They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.” HW’s Linda Lowell suggested yesterday that investors may yet be over-reacting to the real financial situation at both Fannie and Freddie; so long as share prices remain depressed, however, government officials may have little choice but to step in, some of HW’s sources said. “The market now appears to be pricing in a government bailout of some kind, right or wrong, deserved or not,” said one source, who asked not to be named. For taxpayers, many of whom have never heard of either Fannie or Freddie, a federal lifeline for roughly $6 trillion in mortgages owned or guaranteed by both companies would likely come as quite a surprise. The potential for a government bailout of both GSEs helped lead a fresh fall of the dollar on Friday, which in turn helped push oil prices to a new record — above $147 barrel. Which is another way of saying that housing matters more than most might like to think. Disclosure: The author was long FRE and held no other positions of relevance when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.