Barrons magazine, sometimes referred to as BEARons, had some particularly interesting insights into Freddie and Fannie on Saturday.
A month or so back, the magazine ran a cover story about how the two agencies were doomed and reiterated that conclusion in Saturday’s editions.
The agencies are insolvent and the best and cheapest solution, according to the various experts Barrons talked to, would be a government takeover. That would be a big plus for homeowners, potential homeowners, the economy and holders of agency mbs in this country and around the world.
Fannie and Freddie shareholders – common and preferred – would be toast. The value of their shares would disappear.
Barrons estimated the cost to the government in mortgage guarantee losses of a takeover would be around $100 billion. That’s chump change when you consider the cost of the war in Iraq. The bailout would mean the government would guarantee Fannie and Freddie agency mbs, which would immediately lower the cost of mortgage borrowing. Also lowering the cost would be the fact that the entities would no longer pay dividends to shareholders.
It also noted that the latest numbers show the worst of mortgage delinquencies seem to be behind us – which would cut delinquency losses.
(A separate article made a persuasive argument that the housing bust may be nearing its end. Again, read the article and decide for yourself.)
So who agrees with Barrons? Bill Gross, who runs the Pimco Total Return Bond Fund, for one. He’s been buying up agency mbs for his bond fund big time over the past several weeks, the article noted.
Gross, maybe the best bond picker in the world over the past decade, is an incredibly tuned in guy.
Who else would benefit? Banks and any other entities that hold agency mbs. That would obviously be a huge plus for the economy, Barrons notes.
The article didn’t mention NLY, but it could be a big time winner. NLY closed Friday at $14.35, with an annualized dividend of $2.20 or 16.2 percent. At $20/share, its yield would still be more than 10 percent.
The stock price Friday reflected fear, not fundamentals. NLY’s value if the government took over Fannie and Freddie would soar.
Barrons is not a rose-colored glasses magazine that pumps the market and the economy to sell its product. If anything, it takes a conservative, hard-nosed look at what’s happening – and usually is more pessimistic than the talking heads you see on TV.
I suggest anyone invested in NLY -- or anything that deals with agency mbs -- should give it a read.
From what I've seen, Fannie/Freddie must be propped up in some way, even though they are ticking bombs, reportedly with 80-1 leverage. Adding their $5 trillion in debt would effectively double the current national debt (over $9 trillion, of which about $4 trillion is owed to social security, leaving $5 trillion owed to others). That doubling would cause far more and far larger problems than it cured. So the GSEs must stay alive for now, hopefully to be quietly wound down and dismantled when the time is right.
Freddie and Fannie's debt is backed up with collateral -- houses, to be exact. Most mortgage holders who own these houses are making their mortgage payments on time.
If Freddie and Fannie went into conservatorship, the US would be responsible only for the delinquencies -- Fannie and Freddie guarantee the interest rate return to holders of their mbs. The Barrons article suggested that could be $100 billion.
That means most of the debt the government would assume gets paid back by the mortgage holders, not the taxpayers.
And the cost would be less under public ownership, because freddie and fannie would no longer be paying dividends to shareholders -- that dividend money would stay in the US Treasury.
That amount of money is manageable. Not only that, it would settle the market, bring down mortgage rates, goose the economy, and probably help stem the decline of the dollar.