More Bad News on the GSE Front?

Includes: FMCC, FNMA
by: Michael Panzner

Some analysts (including myself), have long warned about the systemic risks posed by government-sponsored enterprises (GSEs) like Freddie Mac (FRE) and Fannie Mae (FNM).

Aside from the fact that GSEs are tremendously exposed to the free-falling housing market, they are also big players in the over-the-counter derivatives market (which has had a few disruptions of its own lately), have close ties with almost every financial institution in the country, and have issued billions upon billions of securities that are held by individual and institutional investors around the world.

In other words, if they have problems, it is unlikely to stop there.

That is why the Reuters report that follows, "Freddie Mac Reduces Reference REMIC Deal," is worth paying attention to. If, on the one hand, today's news that "market forces" led to a reduction in the size of a planned securization deal reflects generally unsettled conditions in mortgage-backed securities markets, that's one thing.

However, if Freddie Mac was forced to scale back the offering because investors are beginning to get queasy about holding GSE-backed paper, then that points to what could be a far more serious problem. A loss of confidence in these well-known institutions at this stage of the game would almost certainly make the upheavals of recent months seem like kids play.

Whatever the case, this latest development is unlikely to be seen as positive in the wake of recent credit market turbulence.

Freddie Mac, the second largest U.S. home funding company, said on Wednesday it reduced the size of a planned Reference REMIC (Real Estate Mortgage Investment Conduits) issue to $400 million, its smallest ever.

Freddie Mac trimmed the issue due to current market conditions, it said in a statement. On Monday, it said it planned to sell $700 million in the REMICs,

It would be the first offering of Reference REMICs since October, when Freddie Mac sold $500 million of the securities. The new issue is expected to price on Thursday.

The REMICs have a final maturity of Feb. 15, 2013. Settlement is Feb. 20.

A Freddie Mac spokeswoman did not immediately return a call seeking comment.

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