Hello Maurice, the shape of things to come is getting more evident ... the Great Unwinding and the Ultimate Cleansing
Freddie Mac to Sell Securities Of Fannie Mae to Raise Cash
online.wsj.com
By JOHN D. MCKINNON, PATRICK BARTA and AARON LUCCHETTI
Staff Reporters of THE WALL STREET JOURNAL
Freddie Mac, one of the country's two mortgage-finance titans, said it would dump securities issued by its rival, Fannie Mae, in order to raise cash to bolster its own financial health.
In a statement posted on its Web site, Freddie Mac said it was making several moves to support the "weakened" price of the mortgage-backed securities it issues on Wall Street. Freddie Mac plans to sell a portion of its huge holdings of the mortgage-backed securities issued by Fannie Mae, and use the proceeds to buy up more of its own. In addition, Freddie Mac said it also plans to cut fees it charges to lenders in connection with its securitizations.
Both steps are aimed at reducing a widening price gap between mortgage-backed securities of Freddie Mac and Fannie Mae. The moves also reflect the fierce pressures Freddie Mac has faced in recent months -- and the toll that those pressures now appear to be taking on it.
In June, an accounting scandal led to the ouster of several top executives at Freddie Mac. While company officials have argued strenuously that Freddie Mac's underlying business hasn't been affected, the pricing problems with its mortgage securities suggest otherwise, some analysts said.
"I think a lot of it has to do with what's taking place internally," said Chris Buonafede, a mortgage-finance analyst at Fox-Pitt, Kelton in New York. "It's rudderless right now."
But even before the accounting problems broke, Freddie Mac was coming under pressure in debt markets as a result of the record-setting mortgage boom. That wave of new mortgages -- including millions of refinancings of existing mortgages -- has undercut the performance of Freddie Mac's securities versus Fannie Mae's, because the mortgages underlying Freddie Mac's securities have tended to be refinanced much more quickly. Faster prepayment of the mortgages underlying a security raises the risk that the security won't pay off exactly as expected, lowering its value.
To boost its securities' prices, Freddie Mac said this week that it has begun slashing the fees it charges to some lenders for its securitization services. In return, Freddie Mac hopes to obtain more mortgages from lenders that aren't refinanced as quickly, and make its mortgage-backed securities more attractive. Freddie Mac and Fannie Mae have been criticized by some lenders for using their size and market dominance to overcharge on their fees, an allegation that the companies deny. (See article.)1 The two government-sponsored companies control about half the U.S. mortgage market. Their basic business is buying mortgages from lenders and packaging them into mortgage-backed securities.
Also, Freddie Mac said this week that it would begin selling off some of its own holdings of Fannie Mae mortgage-backed securities. That could drive down the price of Fannie Mae's securities, at least somewhat. Freddie Mac owned a total of $77 billion of Fannie Mae MBS at the end of last year, out of Freddie Mac's total investment portfolio of $583 billion. With the proceeds, Freddie Mac said it would start buying up more of its own MBS -- temporarily suspending its internal rate-of-return thresholds -- in order to drive up its own MBS price and further reduce the gap.
Some market participants raised eyebrows at Freddie Mac's moves. "It's very rare" for a company to sell a competitor's securities to buttress its own, said Michael Cheah, a senior fixed-income portfolio manager at SunAmerica Asset Management in Jersey City, N.J. "Ford doesn't try to buy back their bonds because GM's trade differently," he said. A Fannie Mae spokeswoman declined to comment.
Freddie Mac warned that if its strategies don't succeed in the long term, "this could have a material adverse effect on the profitability of Freddie Mac's securitization business." Several analysts said they don't believe the company is in any financial danger, however.
Some investors suspect one reason for Freddie Mac's prepayment problem is that it is "cherry-picking" some of the best loans it takes from the marketplace to hold in its own portfolio, leaving loans that are more likely to refinance early in the securities it sells to others. While Freddie Mac strenuously denies it inappropriately picks out the best loans, recent data from the company confirmed that loans owned by Freddie perform better.
At 4 p.m. Thursday, Freddie Mac was down $1.05 to $56.25 in New York Stock Exchange composite trading.
Separately, a spokesman said the Senate Banking Committee would hold an additional hearing this year on Freddie Mac and Fannie Mae, a day after Fannie Mae disclosed that it was correcting an accounting error of its own that caused an understatement of about $1.1 billion in its stockholder equity. The announcement has added to pressure for legislation to improve oversight of the companies. People familiar with the matter said Fannie Mae officials learned of the problem late last week and disclosed it to regulators earlier this week.
Write to John D. McKinnon at john.mckinnon@wsj.com2, Patrick Barta at patrick.barta@wsj.com3 and Aaron Lucchetti at aaron.lucchetti@wsj.com4
Chugs, Jay |
