Wednesday, August 27, 2008

Merrill downgrades FRE & FNM

Citigroup pumps them yesterday, and Merrill downgrades them today-FNM to 5, FRE to 3. And then we have this news on FNM and FRE.

Aug. 27 (Bloomberg) -- The crisis of confidence that sent Fannie Mae and Freddie Mac debt costs to record highs above U.S. Treasuries is also providing the mortgage-finance companies with the biggest profits on new investments since at least 1998.

The current-coupon mortgage bonds Fannie and Freddie buy yield about 40 basis points, or 0.40 percentage point, more than what they pay to borrow by selling benchmark bonds, according to Citigroup Inc. The difference exceeded 20 basis points only twice in the 10 years through 2007 -- in 1998 and 2003.

The gap enables the government-chartered companies to offset some of the credit losses on mortgages they own or guarantee and eases pressure on U.S. Treasury Secretary Henry Paulson to step in with a bailout. The companies, which profit from their $1.6 trillion of mortgage investments, have tumbled more than 85 percent this year in New York Stock Exchange trading as mortgage delinquencies grow and the cost of debt rises.

``From Fannie and Freddie's perspective, there's actually better investments now,'' said Moshe Orenbuch, an analyst at Credit Suisse Group in New York, adding that their interest margin is likely to continue to widen. ``It's ironic.''

``They, at the increment, are very, very profitable,'' said Dan Fuss, vice chairman of Loomis Sayles & Co. in Boston and co- manager of the $17 billion Loomis Sayles Bond Fund. ``If they can continue to do anything close to business as usual, they are immensely profitable.''

``Our funding costs remain attractive, particularly based on the opportunities to purchase mortgage assets at attractive spreads,'' Freddie spokesman Michael Cosgrove said. A Fannie spokesman, Jason Lobo, declined to comment...

Fannie and Freddie's holdings are shrinking at a monthly rate of about $20 billion because of refinancings, home sales and borrower defaults, according to an Aug. 21 report from New York-based Citigroup analysts Scott Peng, Brad Henis, and Brett Rose. That money can be reinvested into higher yielding securities.

That is one reason ``there is no pressing need'' for a bailout, they wrote in the report, titled ``All That Sound and Fury, Signifying Nothing New.''

The companies are also boosting fees to guarantee home-loan securities, off-balance-sheet obligations for which they don't need to borrow. Fannie plans on Oct. 1 it will double to 50 basis points an upfront ``adverse market delivery charge,'' introduced this year for every mortgage the company buys or guarantees.

Same news, different viewpoints. And probably different trading positions!

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