Monday Morning Cup of Coffee: Bubble, bubble, toil and trouble

Monday Morning Cup of Coffee: Bubble, bubble, toil and trouble

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OFHEO: Portfolio Investments by GSEs Must Comply With Subprime Guidance

From the Office of Federal Housing Enterprise Oversight this morning comes news that the GSEs are now held to standards set in the Interagency Guidance on Nontraditional Mortgage Product Risks on all private-label securities purchases. This means that all nontraditional and subprime loans purchased by Fannie Mae and Freddie Mac as part of private-label securities transactions -- separate from each GSE's purchase of subprime loans in the regular course of business -- are now governed by the regulatory guidance. From the press statement:
Fannie Mae and Freddie Mac hold approximately $370 billion in private-label securities, almost all of which carry the highest investment grade rating. Approximately $170 billion of these securities are backed by subprime mortgages. Since these securities were acquired before the implementation date, they will not be affected by the guidance ... Fannie Mae and Freddie Mac expressed their full support for these actions. Fannie Mae announced their compliance with the Statement on Subprime Mortgage Lending directive on August 15, 2007, in a Lender Letter. Freddie Mac announced their compliance with the directives in communications to their dealers and sellers on September 7, 2007. The Enterprises have also pledged their continued support of subprime borrowers. Freddie Mac has said that it will purchase $20 billion of subprime loans and Fannie Mae “tens of billions� of subprime loans over the next several years.
This essentially means that going forward, Fannie and Freddie will no longer be able to buy high-yielding securities backed by risky mortgages in the subprime sector -- even if those securities are highly-rated. But it's a posthumous move of sorts, given that the market for subprime securities in general has already waned of its own accord. The GSEs may have bought some AAA paper in certain subprime deals, but the lower tranches were what really drove demand for these sorts of securities -- and its those mezzanine and equity buyers that have literally evaporated, making it pretty easy for Fannie and Freddie to agree to comply here. There probably isn't much of this stuff left to buy right now anyway.

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