Saturday, February 13, 2010

Freddie and Fannie announce wide-scale buyouts: implications for the market

Fannie and Freddie announced Wednesday that they will commence accelerated buyouts of 120-day plus delinquent loans from mortgage pools. These announcements were to be expected as a number of developments over the past few months all had led to this event, including the GSEs’ adoption of FAS167 and the increase in the GSE portfolio caps for 2010.

The only uncertainty was around the timing and duration of the GSEs’ plan. Freddie’s buyout plan is surgical – it intends to clean up its delinquency pipeline in one fell swoop in February (March factor date). Fannie Mae’s buyout plan will start one month after Freddie’s. According to Fannie’s press release:

“The company will begin to purchase these loans in March 2010, with the first purchases being reflected in the MBS pool factors released on the fourth business day of April 2010. We expect to purchase a significant portion of the current delinquent
population within a few month period subject to market, servicer capacity, and other constraints.”

We believe that the reinvestment needs generated by these buyouts could be as much as $130-140 billion from private investors, and represents a strong technical for the mortgage market. For this reason, we are raising our mortgage basis recommendation from negative to neutral. We prefer 4.5s and 6.5s (post buyout) the most; the middle of the stack (5s and 5.5s) remain fundamentally rich. We discuss the buyout news and the implications in more detail
Freddie and Fannie Announce

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