Fannie Securitizes to Boost Issuance, Liquidity

Government-sponsored entity Fannie Mae (FNM) in Q109 began testing the process of securitizing its whole residential mortgage loan portfolio in an effort to boost liquidity at the company. The initiative also boosted agency mortgage-backed securities (MBS) issuance in the process. A Bank of America (BAC) analyst noted a surprising spike in agency MBS issuance last week. Specifically, from Wednesday to Friday, the agencies — both Freddie Mac (FRE) and Fannie Mae — issued $65.5bn in MBS, bringing the total monthly agency MBS issuance to date to $162.7bn. The analyst said this spike in issuance comes as a surprise to the market, since the overall originator selling remained low over the past several weeks. However, a closer look at the data shows that about $41.5bn agency MBS issuance so far this month comes from seasoned pools; $26.9bn originated in 2003 while $4.5bn came from 2002 origination loans. “It is likely that some banks or insurance companies that owned seasoned loans are securitizing them to sell into the current strong bid for this product, which helps them to both recognize profits and reduce the size of the balance sheet,” says the analyst. And that’s just what Fannie’s been up to, according to a Securities and Exchange Commission filing dated May 8, in which the company said its unencumbered mortgage portfolio includes whole loans that Fannie could securitize for sale or use as collateral for loans under the Treasury Department‘s GSE credit facility. “Currently, however, we face technological and operational limitations on our ability to securitize these whole loans, particularly in significant amounts, as our systems were not designed to support the securitization of whole loans in our portfolio into Fannie Mae MBS,” company officials said in the filing. “We expect that the necessary technology and operational capabilities to support the securitization of a significant portion of our single-family whole loans will be in place during the second quarter of 2009.” The GSE’s conservator, the Federal Housing Finance Agency, warned in a May 18 Congressional report that Fannie’s liquidity situation is tight. So if the enterprise cannot issue debt and borrow through mortgage repurchase agreements, it must rely on the Treasury’s credit facility, which is scheduled for expiration at year-end ’09. “Fannie Mae cannot securitize its $256bn single-family whole loan portfolio, although it expects to be able to securitize a substantial portion of its portfolio during the first or second quarter of 2009,” FHFA’s report reads, in part. “During the first quarter of 2009, Fannie Mae conducted a successful pilot test of its ability to securitize its existing whole loan portfolio.” The effort indeed appears to have been successful, as it prompted even BofA analysts to slow down and take a closer look into the issuance numbers for the month. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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