Better housing market underpins Fannie and Freddie

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have benefited from the housing market recovery. Fannie Mae is up 29.90% and Freddie Mac rose 33.10% year to date as of July 3, 2014. The housing market has stabilized since the crisis. People are in less danger of losing their homes as foreclosures dropped, rising home prices are supporting higher home equity, and job growth is recovering. The latter is crucial to home sales and to timely mortgage payments.

Fannie Mae FNMA Freddie Mac FMCC
Fannie Mae FNMA Freddie Mac FMCC

 

According to JP Morgan, the rise in mortgage rates this year has curbed housing demand. Usually, it takes 6 months to a year for housing demand to recover after a mortgage rate increase. However, the inventory of unsold homes is still limited and demand for housing is still recovering, which will support more housing starts. New home construction could add approximately 0.5% to second half GDP growth, in JPMorgan Chase & Co. (NYSE:JPM)’s view. Modest housing demand will continue to support mortgage origination benefiting both Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Fannie Mae, Freddie Mac: Mortgage finance reform is looming

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) back about 60% of new mortgages issued in the U.S. Currently both entities are under Federal conservatorship, with the Federal Housing Finance Agency acting as conservator, since Sept. 6, 2008. The housing industry will prefer that Congress carves out some government involvement with both Fannie Mae, and Freddie Mac. Such involvement will be scaled back in favor of private investment.

The conservatorship was meant to be a temporary measure. Congress is working on bills to do away with Fannie Mae and Freddie Mac or to change the conservatorship agreement. The Republican version (Johnson-Crapo bill) has no backstop and proposes a 5 year wind down process. This bill has no support and it is being replaced by the Democratic version (Delaney-Carney-Himes) that includes the possibility of keeping Fannie and Freddie as going concerns. The sense of urgency in ending the conservatorship has waned as both Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have remained profitable. Market participants are concerned about increased lending costs that could arise from shifting mortgages to banks in the private sector.

Risk sharing with private sector

Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is working on sharing risk with private market participants. The company purchased insurance to cover about $285 million in losses on a pool of U.S. mortgages. It worked with both insurers and reinsurers to link policies to loan losses.