Although Fannie Mae (FNMA) stock is trading about 50% below its year-to-date high, interest in the government-sponsored enterprise (GSE) remains strong. The daily average trading volume tops 6 million shares, and over the past five trading sessions, the stock has added about 11%.
Earlier this week, the agency, (AKA the Federal National Mortgage Association) issued a mortgage-backed security (MBS) under its green financing program for multifamily housing. Fannie also extended its timeframe for Americans who have taken or will be taking advantage of Fannie’s forbearance program.
The most far-reaching development of the week was the agency’s announcement that it is about to begin a bidding process to select a financial advisor to “assist in developing and implementing a plan for recapitalizing and responsibly ending its conservatorship.” More than 10% of the stock’s weekly gain came following Monday’s announcement of the search for an advisor.
$500 Million in Green Mortgage-Backed Securities Issued
Fannie priced its second 2020 green multifamily real estate mortgage investment conduit (REMIC) at $529.4 million. An agency executive noted, that in spite of mortgage market challenges, the agency continues to issue green securities with “the same high-quality credit” profile as Fannie’s other MBSs.
Fannie was not the only issuer of MBSs this week. Goldman Sachs Group Inc. (NYSE: GS) issued the first prime non-agency MBS in nearly two months, following the market collapse due to the COVID-19 outbreak. The $355 million deal does not include any mortgage loans currently in forbearance.
Fitch Ratings gives the Goldman Sachs MBS an expected rating of AAA. The top rating is largely based on the loan portfolio’s high percentage of jumbo fixed-rate mortgages (79%) and high borrower credit scores (average 764). Fitch further noted that mortgages carrying this rating can withstand a forbearance rate of 7.75%.
Fannie and Freddie Extend Forbearance Purchases
As of last Friday, Fannie Mae and Freddie Mac (FMCC) (or the Federal Home Loan Mortgage Corporation) combined had a forbearance rate of 7.0%. That total represents 1.96 million mortgages, or about 42% of all mortgage loans in forbearance. For those borrowers, Fannie and Freddie announced new, relaxed guidelines on when homeowners who take forbearance can apply for new mortgages. For mortgage lenders, the two GSEs have extended by one month the time during which the agencies will purchase loans in forbearance.
Homeowners who have missed payments and entered into a forbearance agreement may apply for refinancing or a new loan after making three payments on time. Waiting periods for borrowers who missed payments due to COVID-19 also have been temporarily eliminated.
According to Black Knight, a software and solutions provider to the mortgage industry, some 4.7 million homeowners are in forbearance programs with their loan servicers. The total represents 8.8% of the entire active mortgage universe and just over $1 trillion in unpaid principal.
The Hunt Is on for a Financial Advisor
Fannie Mae and Freddie Mac were placed under Federal Housing Finance Agency (FHFA) conservatorship in 2008, following a $190 billion bailout to keep the two GSEs from failing during the financial crisis. Since being placed into conservatorship, the two GSEs have returned more than $300 billion in dividend payments to the U.S. Treasury.
About 20% of Fannie Mae stock trades over the counter, and the federal government owns the remaining 80% of preferred stock. Last March, the Trump administration announced a three-pronged plan to overhaul Fannie Mae and Freddie Mac following a March order from the president. In October, the FHFA announced a more detailed strategic plan for the two agencies, which together hold about a third of the country’s nearly $16 trillion in mortgage debt.
The first step in that plan was to pay Houlihan Lokey Capital $9 million to help the FHFA develop and implement a roadmap for the privatization of Fannie and Freddie. Sending out a request for bids to develop and help implement a plan is the next step. That’s the one the agencies took on Tuesday.
According to the Fannie Mae announcement, the selected financial advisor will work closely with the agency and with the FHFA “to consider business and capital structures, market impacts and timing, and available capital raising alternatives, among other items.” Earlier this year, the administration had hoped to get an initial public offering (IPO) launched by early 2021. That still could happen, but now (and the foreseeable future) may not be the best time to launch a public offering of stock in what could be the largest IPO ever.
Black Knight also estimates that Fannie and Freddie combined are advancing monthly principal and interest payments totaling $2.2 billion on mortgages in forbearance. The agencies have a four-month cap on such payments to servicers. Still, Fannie and Freddie could be on the hook for an additional $8.8 billion in monthly mortgage payment advances.
The conflict between a growing total of balance sheet liabilities, while good for mortgage borrowers, is bad for an IPO. A big credit write-down on forbearance could reduce the IPO’s net proceeds. Worst, though, is the lack of an explicit federal guarantee for Fannie Mae and Freddie Mac bonds. The odds of that happening before January 2021 are approximately zero.