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Refer to page 17 of this report for Stifel Nicolaus Fixed ...


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Refer to page 17 of this report for Stifel Nicolaus Fixed ...

  1. 1. The Future of the GSEs? GIOA Conference Las Vegas - March 25, 2010 Jim DeMasi, CFA Managing Director & Chief Fixed Income Strategist Stifel, Nicolaus & Company, Incorporated. Refer to page 17 of this report for Stifel Nicolaus Fixed Income Capital Markets disclosures and analyst certifications. Stifel, Nicolaus & Company, Incorporated Member NYSE / SIPC
  2. 2. Active GSE Debt Issuers <ul><li>Federal Home Loan Bank System (FHLB) </li></ul><ul><ul><li>Consists of 12 regional banks; Extends credit to owner-members to support mortgage lending. </li></ul></ul><ul><li>Fannie Mae (FNM) </li></ul><ul><ul><li>Federally chartered, privately owned corporation that promotes secondary market for conventional mortgages. </li></ul></ul><ul><li>Freddie Mac (FRE) </li></ul><ul><ul><li>Federally chartered, privately owned corporation that promotes secondary market for conventional mortgages. </li></ul></ul><ul><li>Federal Farm Credit System (FFCB) </li></ul><ul><ul><li>Nationwide system of banks and associations that provides credit to farmers, rural homeowners, and agricultural and rural cooperatives. </li></ul></ul><ul><li>Tennessee Valley Authority (TVA) </li></ul><ul><ul><li>Wholly owned corporation of the US government established in 1933 to develop the resources of the Tennessee Valley region for economic and national defense purposes. </li></ul></ul><ul><li>Federal Agricultural Mortgage Corp (Farmer Mac) </li></ul><ul><ul><li>Established as an institution of the Farm Credit System in 1987, Farmer Mac provides a secondary market for agricultural and rural utility loans. </li></ul></ul>
  3. 3. GSE Debt Outstanding Source: GSEs as of 3/15/2010.
  4. 4. Recent Developments US Treasury granted emergency authority to provide financial assistance to GSEs. Fannie and Freddie announce $200B delinquent loan buyout program. Federal Housing Finance Agency (FHFA) created to regulate Fannie, Freddie, and FHLB. Fannie and Freddie placed into conservatorship by FHFA. Senior Preferred Stock Purchase Agreement (SPSPA) established by US Treasury. Federal Reserve announces program to buy $200 billion in GSE senior debt and $1.25 trillion in GSE mortgage-backed securities. US Treasury extends and amends SPSPA. Cumulative investments by the Federal Reserve: $171 billion in GSE debt and $1.2 trillion in GSE MBS. Cumulative preferred stock investments by US Treasury total $128B as of 3/15/10. Obama administration 2011 budget proposal fails to address GSE reform. July 2008 September 2008 March 2009 December 2009 February 2010 March 2010
  5. 5. Conservatorship Provisions <ul><li>US Treasury is permitted to make unlimited investments in FNM and FRE senior preferred stock through 12/31/12 to maintain positive net worth in GSEs. After year-end 2012, maximum investment is limited to $200B per agency. </li></ul><ul><li>Senior preferred stock held by US Treasury carries a 10% annual dividend, payable quarterly. </li></ul><ul><li>Payment of quarterly commitment fee to US Treasury for support provided under SPSPA has been delayed until first quarter 2011. </li></ul><ul><li>Retained portfolio limits are set at $810B per agency as of 12/31/10. After 2010, the portfolio limits will be set at 90% of the previous year’s cap. </li></ul>
  6. 6. GSE Debt and MBS Spreads
  7. 7. Conservatorship and Fed Bond Purchases Have Kept Mortgage Rates Low
  8. 8. GSE Reform: Public Policy Issues <ul><li>To what extent should housing be subsidized by the federal government? </li></ul><ul><li>If subsidies are appropriate, what form should they take? </li></ul><ul><li>What role should the government play in mortgage lending? </li></ul><ul><li>Should securitization continue to supply the bulk of the funding for mortgage lending in the US? </li></ul><ul><li>How can the policy mistakes of the past be corrected without unduly restricting the availability of mortgage credit? </li></ul><ul><li>Should GSE reform be extended beyond FNM and FRE? </li></ul>
  9. 9. GSE Reform: Possible Approaches <ul><li>Nationalization </li></ul><ul><ul><li>Fold the GSEs into the federal government, like the FHA, VA, and GNMA. </li></ul></ul><ul><li>Privatization </li></ul><ul><ul><li>Reconstitute the GSEs as private companies with no government support or replace the GSEs with alternative approaches to mortgage finance. </li></ul></ul><ul><li>Hybrid Model </li></ul><ul><ul><li>Combine private ownership with some level of government support or backing. </li></ul></ul>
  10. 10. GSE Reform: Nationalization Eliminates uncertainty for investors Pros: Cons: Lowers funding costs for GSEs Reduces mortgage rates for consumers Subjects GSEs to political influence Increases the national debt Raises the risk of future bailouts
  11. 11. GSE Reform: Privatization Expands choices for consumers Pros: Cons: Allocates capital more efficiently Reduces taxpayer liability Contracts credit availability for lower income borrowers Requires extensive transition from status quo Results in higher mortgage rates, tighter underwriting standards
  12. 12. GSE Reform: Good Bank/Bad Bank Model <ul><li>Retained portfolios and legacy guarantees could be placed into receivership and wound down over time (bad bank). </li></ul><ul><li>FNM and FRE could be combined and given responsibility for mortgage guaranty business on a going forward basis (good bank). </li></ul><ul><li>ADVANTAGES: </li></ul><ul><li>Frees GSEs of legacy problems to focus on new business </li></ul><ul><li>Preserves historical role of GSEs in secondary mortgage market </li></ul><ul><li>Provides a possible gateway to future privatization </li></ul><ul><li>DISADVANTAGES: </li></ul><ul><li>Creates potential confusion among investors </li></ul><ul><li>Results in dislocation in both the primary and secondary markets </li></ul><ul><li>Poses administrative and management challenges, particularly within “bad bank” </li></ul>
  13. 13. GSE Reform: Public Utility Model <ul><li>Retain private ownership structure, but with increased government oversight over pricing, products, and operations. </li></ul><ul><li>ADVANTAGES: </li></ul><ul><li>Maintains continuity in mortgage markets </li></ul><ul><li>Ensures consistent regulation of mortgage pricing and terms </li></ul><ul><li>DISADVANTAGES: </li></ul><ul><li>Reduces free market competition and innovation </li></ul><ul><li>Retains strong government influence over mortgage lending </li></ul>
  14. 14. GSE Reform: Cooperative Model <ul><li>Use FHLB System as a model for restructuring FNM and FRE. Lenders that sell mortgages to GSE would be required to hold stock in proportion to their sales activity. </li></ul><ul><li>ADVANTAGES: </li></ul><ul><li>Aligns financial incentives of lenders with GSEs </li></ul><ul><li>Replicates model that survived economic downturn without external government support </li></ul><ul><li>DISADVANTAGES: </li></ul><ul><li>Complicates timely decision making </li></ul><ul><li>Conveys effective control to largest lenders </li></ul>
  15. 15. GSE Reform: Credit Guarantor Model <ul><li>Replace the GSEs with multiple credit guarantor entities. Securities issued by guarantor entities would be backed by a government insurance fund. </li></ul><ul><li>ADVANTAGES: </li></ul><ul><li>Utilizes private sector expertise for risk-based pricing </li></ul><ul><li>Provides catastrophic insurance against another mortgage meltdown </li></ul><ul><li>DISADVANTAGES: </li></ul><ul><li>Raises questions about the extent of the government’s liability </li></ul><ul><li>Exposes taxpayers to ongoing risk </li></ul>
  16. 16. Conclusions <ul><li>GSE reform is a politically contentious issue, with no obvious solution for garnering bi-partisan support. In 2010, it faces the additional challenges of a crowded legislative agenda and mid-term Congressional elections. </li></ul><ul><li>FNM and FRE will likely remain in conservatorship throughout 2010 and possibly for many more years to come. </li></ul><ul><li>Debt securities and MBS issued by FNM and FRE will likely continue to be protected by the “effective” guarantee of US government regardless of the ultimate outcome of GSE reform. </li></ul><ul><li>Given the dominant role of the GSEs in the US mortgage market, and the severe dislocations that could result from their absence, drastic changes such as full privatization are highly unlikely. </li></ul><ul><li>A cooperative model, patterned after the FHLB System, may be the most viable alternative for reaching a politically acceptable compromise. </li></ul>
  17. 17.   Additional information is available upon request. For Distribution to Institutional Investors Only. Stifel, Nicolaus & Company, Incorporated makes a market in the aforementioned securities as at the date of issuance of this research report noted at the top of page 1 of this report. Stifel, Nicolaus & Company, Incorporated has managed or co-managed a public debt offering for FannieMae, Freddie Mac, the FHLB and/or the FCCB within the past 12 months. Stifel, Nicolaus & Company, Incorporated has received compensation in the past twelve months, or expects to receive compensation in the next three months, for investment banking services from one or more of the borrowers mentioned in this report. The Fixed Income Capital Markets trading area of Stifel, Nicolaus & Company Incorporated owns debt securities of the borrower or borrowers mentioned in this report. The information contained herein has been prepared from sources believed reliable but is not guaranteed by Stifel, Nicolaus & Company, Incorporated and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of investors. Employees of Stifel Nicolaus or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. No investments or services mentioned are available to “private customers” in the European Economic Area or to anyone in Canada other than a “Designated Institution”. Stifel Nicolaus and/or its employees involved in the preparation or the issuance of this communication may have positions in the securities or options of the issuer/s discussed or recommended herein. Securities identified herein are subject to availability and changes in price.   Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel Nicolaus and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivative instruments based thereon. Readers of this report should assume that Stifel Nicolaus or one of its affiliates is seeking or will seek investment banking and/or other business relationships with the issuer or issuers, or borrower or borrowers, mentioned in this report. Stifel Nicolaus’ Fixed Income Capital Markets research and strategy analysts (“FICM Analysts”) are not compensated directly or indirectly based on specific investment banking services transactions with the borrower or borrowers mentioned in this report or on FICM Analyst specific recommendations or views (whether or not contained in this or any other Stifel Nicolaus report), nor are FICM Analysts supervised by Stifel Nicolaus investment banking personnel; FICM Analysts receive compensation, however, based on the profitability of both Stifel Nicolaus (which includes investment banking) and Stifel Nicolaus’ Fixed Income Capital Markets. The views, if any, expressed by FICM Analysts herein accurately reflect their personal professional views about subject securities and borrowers. For additional information on investment risks (including, but not limited to, market risks, credit ratings and specific securities provisions), contact your Stifel Nicolaus financial advisor or salesperson. I, Jim DeMasi, certify that the views expressed in this presentation accurately reflect my personal views about the subject securities or issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this presentation. © 2010 Stifel, Nicolaus & Company, Incorporated, One South Street, Baltimore, MD 21202. All rights reserved. Fixed Income Capital Markets Disclosures