Annaly Capital To Take Fannie, Freddie's Place?

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Includes: FMCC, FNMA, ICF, IYR, NLY
by: Judy Weil

Could Annaly Capital Management (NYSE:NLY) be one of the 'private sector partners' that Geithner referred to in his plan to save the economy?

From Annaly's Q408 conference call:

Annaly bucks the party line:

The government should be increasing savings, not spending.

Perhaps tax incentives can be added to accelerate the process. To strategically direct the increased savings, the tax benefit can be structured to target investment in the public or the private sector.

In general what the Federal Reserve is doing is working… Everybody is fully aware the fed has been a large buyer in the MBF space and early on in its efforts it is due to have a meaningful set of driving yields down, mortgage rates down with each passing week… The repo counterparties are strengthening through time.

Opportunities in the mortgage market:

We have done a lot of work that is proprietary on where we think valuations are going to be occurring or where destruction of capital is going to happen in the mortgage sector… The Federal Reserve… did not start that $500 billion program until January, so there is a ton of money coming in, the biggest balance sheet in the world is in there supporting this market right now... It seems to be handled where need is rather than value. So that speaks to what we think is a great opportunity overall across the entire mortgage spectrum.

Would Annaly take Fannie Mae (FNM) and Freddie Mac’s (FRE) place?

The CEO of one of the major banks... congratulated me on running the third largest capitalized bank in New York.

There is definitely a renewed vigor on trying to figure out what to do with all the deposits that are coming into the banking system. We estimate that there is $0.5 trillion worth of cash earning anywhere between 0 and 1%. It is stuck at the bank, it is stuck in money market funds for purposes of fear right now

Q: You have got Fannie and Freddie which are obviously still in the game with their portfolios, it looks like right now the regulator still wants them to start downsizing at the end of this year and that is obviously going to take a big buyer out of the market even though we have got the fed that is in the market and I am not sure when they are going to get out, how are you looking at what the impact of Fannie and Freddie stepping out of acquiring MBS?

A: It is just the usual opportunity, it is a $5 trillion market that needs to be serviced and operated. In our discussions with the agencies it is clear that they are more focused on the social agenda of monetary policy today rather than on the aspects that we care about which is net interest margin and understanding value in the asset and liability structures. Fannie and Freddie for years we have always viewed as friendly competitors and we have to – who is going to fill the gap in the markets, we think the private sector is the solution.

You are looking at Fannie and Freddie as investments and you could stand back from some of the delinquency into the fourth and foreclosure and social issues they are going to be extrapolated on them, they are pretty good money as a mortgage insurer.

I think the bigger issue for Fannie and Freddie going forward is... how they are going to be separated... The company is going to downsize this portfolio. We see the Fed and the Treasury taking on larger roles here in terms of financing them and we see Fannie and Freddie taking larger and larger steps on the social side to... keep people in [their] houses... Congress is strangling them with these kinds of initiatives. At the end of the day it means we still get 100 cents on the dollar back, the question is how is that 100 cents on the dollar go to play out and be reinvested into the market. So I don’t see them growing that part of the business any more.

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