Deals Intelligence with Matthew Toole of the Deals Intelligence Team at Thomson Reuters for the week of 07-15-08
Transcript:
I'm Matt Toole with the Investment Banking Division of Thomson Reuters and this week's Deals Intelligence highlighting recent events and trends in the US government sponsored enterprises.
Media reports over the past few days have been dominated by speculation that US government sponsored enterprises, specifically Freddie Mac and Fannie Mae, will be severely affected by the increasing decline in the US housing market. Historically, the GSE's have been engines of deal activity for the US bond markets, and the events surrounding the federal credit agencies could have major effects for Wall Street's underwriting business as well as homeowners and investors.
Government sponsored enterprises were created by the United States Congress to enhance the flow of credit to targeted sectors of the economy and to make those sectors more efficient and transparent. There are a variety of these federal credit agencies focusing on agriculture, home finance and education, including the Farm Credit System, the Federal Home Loan Banks and of course Fannie Mae, Freddie Mac. Sallie Mae was charted by Congress in 1972 to focus on the education sector and was fully privatized in 1995, Despite the government charter, Fannie Mae and Freddie Mac are privately owned, public companies and carry no explicit government guarantee. The basic business model of the GSEs is buy loans or mortgages and re-package them through securitization. Funding to buy these loans comes from the agency debt market.
Together, Fannie and Freddie own or guarantee about $5.2 trillion or US home mortgages- - - - - nearly half of all those outstanding -- demonstrating how critical they are to the
housing market.
As the credit crisis moved to different segments of the global bond market, investors Have shown an increased interest in the debt of the government sponsored enterprises. Over the past few years, the size of the market for agency new issues has decreased as investors were attracted to higher yielding corporate bonds, securitizations and CDOs. With those markets largely shut down, agency debt has experienced a
resurgence, up 50% over last year at this time.
With mortgage concerns weighing on Fannie Mae and Freddie Mac, the two companies share price has plunged nearly 50% over the last week. The Treasury Department and Federal Reserve are now evaluating plans to bolster the agencies with equity investments,or additional lending facilities.
For homeowners, the disruption in the mortgage business of Fannie Mae or Freddie Mac could mean higher borrowing costs on new or existing mortgages and for Wall Street lower deal volume could take a bite out of a significant fee generator. Over the past five years, Fannie Mae and Freddie Mac have paid an estimate $6.5 billion in underwriting fees to Wall Street firms, a steady revenue stream in a market that isn't turning out to be so steady.
For additional coverage on the Agency Bond market, including volume trends and underwriting statistics, be sure to check out our quarterly investment banking reviews available at thomsonreuters.com/league.
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