BlackRock Bets on GSE Bailout

[don]

BlackRock looks to buy more U.S. mortgage agency debt

12:30am EDT
By Kevin Plumberg
SINGAPORE (Reuters) - BlackRock, the world's largest money manager, is looking for opportunities to buy U.S. mortgage agency debt in the wake of Standard & Poor's downgrade of the U.S. sovereign rating, said Rick Rieder, the firm's chief investment officer of fixed income, fundamental portfolios.

Financial markets in Asia slumped on Monday after S&P's unprecedented decision to cut the U.S. debt rating on Friday to AA-plus from AAA, a move that could lead to knock-on credit rating cuts of mortgage finance companies Fannie Mae (FNMA.OB: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FMCC.OB: Quote, Profile, Research, Stock Buzz).

Rieder, who oversees some $612.5 billion in assets as of June for BlackRock, is focused on the relative quality of so-called GSE (Government Sponsored Enterprise, a sweet spot of private gain and socialized loss, generally kept ambiguous until needed) debt among other credits.

"GSEs are still a high-quality instrument, and as part of upgrading the liquidity of our portfolio, we have been a buyer of agency mortgages," Rieder told Reuters over the telephone.

"With increased volatility the agency mortgage market can experience some weakness, and if there is weakness we would add to the portfolio again," he added.

For Fannie Mae and Freddie Mac, losing their AAA-rating could lift borrowing costs, potentially making mortgages more expensive for consumers and adding to stress in the already unstable U.S. housing market.

For the past few months since the Federal Reserve's $600 billion bond-purchase programme wound down, BlackRock has been protecting its credit portfolios against risks coming from the euro zone debt crisis and the impasse over the U.S. debt ceiling by increasing exposure to high-grade bonds.

Rieder said the S&P action was well-flagged so will require little if any changes to his portfolios.

He did not expect the role of U.S. Treasuries has collateral in the repo market to change after the S&P downgrade.

"The Treasury market is a $13 trillion market and a lot of the reason it is used as a form of collateral is not just the AAA rating or what was a AAA rating but the incredible liquidity and because it has become such an accepted form of payment and collateral. A one-notch downgrade by one of three agencies won't change that dynamic in any significant form."

Regarding the economic outlook, Rieder believes the U.S. economy will grow below trend for a long time, and the Federal Reserve will not necessarily add more liquidity through a new quantitative easing programme. Rather it may keep the size of its balance sheet for a longer period and extend the duration of some its fixed income assets, he said.

"A recession is unlikely but we can't rule it out."

http://www.reuters.com/article/2011/...7770DM20110808

[don]

Re: BlackRock Bets on GSE Bailout

Hear that whistle son? That's the Gravy Train, right on schedule . . . yesiree

Fannie Mae loss widens; asking taxpayers for $2.8B


By MICHELLE CHAPMAN
AP Business Writer

Last Modified: Aug 5, 2011 10:47PM

NEW YORK — Government-controlled mortgage company Fannie Mae said Friday that its second-quarter loss widened as it continues to seek loan modifications to help reduce defaults amid the ongoing difficulties in the housing and mortgage markets.

Fannie Mae also made $2.3 billion in dividend payments to the U.S. Treasury during the period, which reduces the amount it will be asking taxpayers for to $2.8 billion from $5.1 billion.

Fannie’s rescue has been one of the most expensive government bailouts. The amount of money it has received from the Treasury to stay afloat is set to rise to $104.8 billion when accounting for the latest request. Fannie has paid back $14.7 billion to the Treasury in dividends as of the end of June.

Fannie Mae, based in Washington, D.C., and sibling Freddie Mac, based in McLean, Virginia, were created by Congress to buy mortgages from lenders and package them into bonds that are resold to global investors.

They own or guarantee about half of all mortgages in the U.S., or nearly 31 million home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

The government took over the companies in September 2008 after massive losses on risky mortgage bonds threatened to topple them. The government then put them into conservatorship, a legal arrangement under which the companies’ government regulator controls their financial decisions.

In the second quarter ended June 30, Fannie Mae lost $5.18 billion, or 90 cents per share. That compares with a loss of $3.13 billion, or 55 cents per share, a year earlier.

Revenue climbed 16 percent to $5.24 billion from $4.5 billion.

Net interest income, or money earned from deposits and loans, increased 18 percent to $4.97 billion from $4.21 billion.

The quarter included $6.1 billion in credit-related expenses tied to the company’s pre-2009 book of loans. Fannie anticipates future loan defaults and related charge-offs tied to this book of business will occur over several years. But there is a bright spot, as these loans are becoming a smaller percentage of its guaranty book of business, declining to 34 percent at quarter’s end as compared with 39 percent of its guaranty book of business as of Dec. 31, 2010.

The problem with many of the loans from the pre-2009 book of business is that they were obtained when home prices were rising and people thought they could afford the mortgages that came with them. Home prices peaked during the third quarter of 2006, Fannie said.

Since that time the U.S. economy has fought to regain its footing after a recession. This economic uncertainty, combined with high unemployment levels and low levels of consumer confidence, has pushed home prices down. Many homeowners now struggle to pay for their mortgages, while others feel stuck in their homes due to the supply that’s on the market.

Fannie Mae said Friday that it aims to lower its credit losses while keeping as many families as possible in their homes and protecting property values.

“We remain the largest source of liquidity for the U.S. mortgage market, and we are committed to creating long-term value by helping to build a stable, sustainable housing market for the future,” President and CEO Michael J. Williams said in a statement.

Fannie completed more than 80,000 single-family loan workouts in the quarter, with more than 59,000 of them involving loan modifications, repayment plans and forbearances.

The single-family foreclosure rate of 1.20 percent on an annualized basis was less than the 1.52 percent from a year ago. But Fannie said that it is taking more time to cycle through foreclosures, which is increasing its credit-related expenses and hurting its single-family serious delinquency rates. The company predicts these delays will hurt the overall recovery of the housing market because it will take more time to get rid of the distressed home supply that is out there.

Fannie Mae said 47 percent of its new single-family book of business includes loans bought or guaranteed since the start of 2009. The company anticipates loans acquired in 2009, 2010 and the first half of this year will be profitable over their lifetime, but said it is still too early to tell what will happen.

Its shares slipped a penny to 30 cents in morning trading Friday.

http://www.suntimes.com/business/690...ce=patrick.net