Banking, finance, and taxes

Rising Mortgage Rates, Coronavirus Fears Sinking Fannie Mae Stock

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On March 5, shares of Fannie Mae (FNMA) closed at $2.75, a drop of 25.5% from its year-to-date high of $3.69. Since March 5, Fannie’s shares have fallen to a 52-week low of $1.50, a further slice of 45.5%. That low was posted on March 19.

The stock dropped 9.7% on Wednesday, March 18, following an announcement that Fannie would be helping U.S. homeowners with their mortgage payments if needed and that the agency will suspend foreclosures for 60 days. Fannie may be sympathetic to homeowners as the country seeks to mitigate the spread of the coronavirus, but the agency’s shareholders are apparently a less-understanding lot.

Fannie and its sister agency, Freddie Mac (FMCC), had already been hammered by falling interest rates for real estate loans. According to Mortgage News Daily, on March 2, the mortgage market saw its lowest interest rate in more than a year on a 30-year fixed-rate mortgage: 3.13%. By March 19, the rate for that same loan had jumped to 4.15%.

Unfortunately, that’s still not good news for Fannie Mae and Freddie Mac. Both are now faced with a double whammy of rising interest rates and an almost-certain collapse of homebuyers.

What the Housing Market Is Doing

Sales of existing homes jumped by 6.5% in February, according to a recent report from the National Association of Realtors (NAR). More than 5 million homes were sold last month, largely due to low interest rates and pent-up demand from buyers. The median price of a home sold last month was $270,100, up 8% compared with the February 2019 median of $250,100.

Virtually all the February home sales occurred before Americans began to worry about COVID-19 and millions of U.S. workers were told to stay home to help prevent the disease from spreading. Lawrence Yun, the NAR’s chief economist, commented on what lies ahead for the housing market:

These figures show that housing was on a positive trajectory, but the coronavirus has undoubtedly slowed buyer traffic and it is difficult to predict what short-term effects the pandemic will have on future sales.

With so many Americans at least temporarily unemployed, the last thing most will be thinking about is buying a new home. Even if someone wants to buy a house, there won’t be any open houses, and many real estate agencies are going to be closed. Plus, those ultra-low interest rates have disappeared.

Where Are the 0% Interest Rates?

For homebuyers and other ordinary mortals, the Federal Reserve’s interest rate cut to its overnight lending rate to a new range of 0.00% to 0.25% is meaningless unless the buyer just wants to (and can) borrow the money only to pay it back the next day. That’s not exactly a mortgage.

The current economic crisis resembles the financial crisis of 2008 and 2009. In a nutshell, everyone wants cash. The Fed is buying Treasuries and mortgage-backed securities (MBS) at a terrific pace. Stock prices are tumbling, usually a good sign for mortgage rates that normally see higher demand for bonds drive bond yields (and interest rates) down.

Investors who already own MBS want to sell them for cash. Typically, again, other investors would be willing to buy, but in a dash for liquidity no one wants to buy. Lack of demand means that bond prices will rise as buyers hold out for a higher premium. Mortgage interest rates inevitably rise.

What This All Means for Fannie Mae

Effects of the steps that the Trump administration and other state and local officials have taken to combat the spread of the coronavirus by limiting social contacts are having a chilling impact on the U.S. economy. By one estimate, new claims for unemployment this week alone could top 2.5 million, following a week in which 271,000 new claims were filed. That’s how serious government-ordered shutdowns are pounding the U.S. economy.

In its announcement last Wednesday, Fannie told homeowners affected by “this national emergency” that they are eligible for a forbearance plan to reduce or suspend their mortgage payments for up to 12 months. Homeowners enrolled in a forbearance plan do not incur late fees. Once the forbearance period ends, the servicer “must” work with the borrower to develop a permanent plan to “maintain or reduce” monthly payments, “including a loan modification.”

Affected homeowners also may request mortgage payment assistance by contacting their mortgage servicer. Credit bureaus have been told to suspend reporting of past-due mortgage payments of borrowers in a forbearance plan as a result of the current emergency.

While all these efforts can help homeowners, the announced plans do nothing to lift investors’ hopes for increased revenues for Fannie or Freddie. Quite the reverse, actually. Higher mortgage rates coupled with uncertain employment prospects are not going to send buyers flocking into the arms of mortgage lenders.

Worse, perhaps, dealing with the coronavirus outbreak is almost certain to delay Federal Housing Finance Agency (FHFA) Director Mark Calabria from meeting his targeted public offering of Fannie Mae stock in mid to late 2021. Current investors in Fannie’s common stock may see a little bump in the share price over the rest of this year, but an IPO announcement is unlikely to occur, and that’s what long-term holders of Fannie stock are waiting for.

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