Fannie Mae tries to win investors

Bond investors have another sale to weigh as Fannie Mae is planning an offering. According to The Wall Street Journal, the securities will get their value from a pool of mortgages the company acquired in 2012, spreading the risk of default to bondholders.

The Journal had this story:

Fannie Mae is planning a bond deal that will pay buyers to share a tiny sliver of the risk of the U.S. home-lending business.

The Washington-based company plans to sell about $675 million of securities in an offering that is expected to be announced next month. The securities are derivatives whose value will depend on the performance of a pool of $28.05 billion of mortgages acquired by Fannie Mae in the third quarter of 2012, according to a term sheet reviewed by The Wall Street Journal.

The deal follows a similar issue in July from Fannie’s smaller brother, Freddie Mac. Both companies are issuing the securities to help meet a mandate from their regulator, the Federal Housing Finance Agency, to reduce the cost of defaults to U.S. taxpayers, who bailed out the companies with $188 billion during the financial crisis.

The plan represents the latest effort to lure Wall Street back into a business that generated billions of dollars in fees and profits during the housing boom but has since gone nearly silent.

Fannie and Freddie don’t make mortgage loans, but buy loans made by other lenders and package them into securities that they sell to investors, with a guarantee that buyers will continue to receive regular principal and interest payments even if underlying mortgages default.

Bloomberg Businessweek reported that the sale is a way for the government to reduce the exposure Fannie and counterpart Freddie Mac have to the housing market:

U.S. regulators see the notes as a way to reduce the dominance of the two government-controlled firms and assess if they’re charging enough to guarantee their traditional mortgage bonds, embracing a risk-sharing approach that may play a central role in the future of the $9.3 trillion U.S. mortgage market.

Fannie Mae’s sale, planned for next month, reflects U.S. attempts to reduce its role, with the current share of new mortgages financed by taxpayer-backed programs at about 85 percent. Fannie Mae and Freddie Mac, which were seized by the U.S. five years ago this month amid the worst housing slump since the 1930s, account for about two-thirds of the market.

The risk-sharing transactions resemble provisions included in legislation introduced this year by Republican Senator Bob Corker of Tennessee and Democratic Senator Mark Warner of Virginia, and endorsed by President Barack Obama. The proposal would create an agency to replace Fannie Mae (FNMA:US) and Freddie Mac that would bear catastrophic mortgage losses, after private firms take the first 10 percent.

The Fannie Mae sale comes as bond investors are seeking new supply because banks are increasingly holding onto other mortgages. After 27 non-government bond deals tied to about $12 billion of new mortgages in the first eight months of 2013, no widely marketed sales have been completed in September, according to data compiled by Bloomberg.

The International Business Times had a story that began with this background on how the two firms got to this point:

In September 2008, Freddie Mac and Fannie Mae were placed under federal control after combined losses of $14.9 billion and ongoing concerns about their ability to raise capital threatened the U.S. housing market. Between them, they owned or guaranteed about half of the $12 trillion U.S. mortgage market, including $5 billion of mortgage-backed securities, both significant amounts when you consider that government public debt was $9.5 trillion at the time.

Both have been recovering well over the past five years, Fannie posting a net income of $17.2 billion in 2012 and Freddie netting $10.8 billion over the same period. Importantly for the taxpayer, they have begun to aggressively pay back the $200 billion capital investment they received from the U.S. Treasury.

Now that the pair are back in good health, what does the government plan to do with them?

As of May 2013, Fannie has paid back $95 billion of its $117 billion debt and Freddie has paid $30 billion of its $72 billion debt. But once that debt is paid, there is no mandate to take the company public again or sell it. The original agreement, struck in 2008 when they needed capital, was that in exchange for an injection of cash to keep them afloat, they would give the government premium shares of the two companies, paying out as much as 10 percent to the Treasury on profits made.

The housing market continues to recover and more people are demanding mortgages, making it important that banks and other guarantors can shed some of the risk. Covering the recovery and where the risk ends up will be an important role for journalists, especially since chronicling the risk was a key part of covering the financial crisis.