GSEs’ Delinquency Buybacks Create Capital Need

The nation’s two largest mortgage financiers have been stuck in the red for some time, and they regularly require cash draws from the Treasury to stay afloat. The GSEs’ recent announcements to buy back some $200 billion in seriously delinquent loans from mortgage-backed securities (MBS) holders over the next few months mean they’ll have to come up with some extra cash fast.

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Analysts at ""Barclays Capital"":http://www.barcap.com estimate that Freddie Mac will need to sell off a modest $10 billion to $20 billion of its debt to fully fund the purchases, while Fannie Mae will need to raise about $60 billion.

""Freddie Mac said"":http://dsnews.comarticles/freddie-mac-to-buy-back-more-than-71-billion-in-delinquent-loans-2010-02-10 it plans to purchase “substantially all” mortgages that are 120 days or more past due from security holders, which as of December 31, equated to $71 billion. Freddie plans to complete its purchases over the next month.

Barclays says that even with the shorter timeframe, Freddie’s new debt issuance to raise capital “should barely cause a blip in funding levels in the [discount] market, in large part because Freddie has already pre-funded some $30 billion and can add another $20 billion to its purse from runoff of existing MBS holdings. That leaves a shortfall of $10 billion to $20 billion that Freddie will need to raise through the balance of February and March.

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The story is ""slightly different for Fannie Mae"":http://dsnews.comarticles/fannie-mae-to-purchase-delinquent-loans-from-mbs-trusts-2010-02-11, Barclays said, noting that its pipeline of delinquent loans is far larger. In addition, by Barclays’ estimates Fannie has not pre-funded at all. Fannie had an estimated $127 billion of loans that were at least 120 days past due as of December 31. The company plans to spread its buyouts over several months.

Barclays says Fannie Mae will need to come up with approximately $100 billion over the next three months or so to facilitate buyouts of the existing pipeline. Fannie can pull as much as $40 billion of this amount via runoff from other MBS. For the remainder that’s needed, between $10 billion and $15 billion could be raised in term debt, then Fannie Mae has a 3-4 month window to raise the other $50 billion, but this “is very easily accomplished,” Barclays analysts wrote.

Federal Reserve has been the biggest buyer of GSE debt for the last year. That program is set to terminate on March 31, but it appears that there may be plenty of private investor appetite to pick up the slack.

The GSE debt is considered low-risk since it’s guaranteed by the federal government, and will likely be issued as short-term securities at a discount. It’s considered a rich opportunity for investors who’ve encountered a dwindling supply of safe-bet Treasury bills.

The _Wall Street Journal_ cited Jim Vogel, SVP of FTN Financial, as saying in a note to investors, “Renewed debt issuance, which will be well short of that $200 billion total, will re-energize domestic money-manager interest in the debt market.”

Barclays said in its report, “We do not think the scale of the buyouts pose significant challenges for the GSEs from a funding perspective. Even if the timeline for buyouts were more compressed, the [discount] market is deep and liquid enough to allow the GSEs the flexibility to raise cash fast.”