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US Agency Market 2010 and Beyond. CONFIDENTIAL. California Municipal Treasurers Association April 21, 2010. Ivan Hrazdira, Managing Director. The materials may not be used or relied upon in any way. %. Agency Market Stats. Fannie Mae: Total Debt Outstanding:$785.8bnas of Feb 28, 2010

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US Agency Market 2010 and Beyond

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Us agency market 2010 and beyond

US Agency Market 2010 and Beyond


California Municipal Treasurers Association

April 21, 2010

  • Ivan Hrazdira, Managing Director

The materials may not be used or relied upon in any way.

Agency market stats


Agency Market Stats

Fannie Mae:

Total Debt Outstanding:$785.8bnas of Feb 28, 2010

Total Long Term Debt Outstanding:$581.6

Total Long Term Issuance:$52.4

Total Net Long Term Issuance:($3.5)

Freddie Mac:

Total Debt Outstanding:$833.3bnas of Mar 31, 2010

Total Long Term Debt Outstanding:$596.2

Total Long Term Issuance:$111.2

Total Net Long Term Issuance:$16.9


Total Debt Outstanding:$870.9bnas of Mar 31, 2010

Total Long Term Debt Outstanding:$682.7

Total Long Term Issuance:$148.4

Total Net Long Term Issuance:($49.4)

Farm Credit:

Total Debt Outstanding:$173.3bnas of Mar 31, 2010

Total Long Term Debt Outstanding:$163.8

Total Long Term Issuance:$24.5

Total Net Long Term Issuance:($0.7)

Our outlook on spreads


Our Outlook on Spreads

  • Pro:

  • Sidelined overseas investors have returned to the market

  • Relatively low global rates will make spread product appealing

  • Government has stressed a solid backing of the GSE credit through PSPA

  • Our base case scenario is for swap spreads to tighten

  • Con:

  • GSE Supply in short term will be higher than the market was anticipating

  • “Legislative orphans”

  • Higher rates may bring in convexity paying in swaps

Preferred stock purchase agreement


Preferred Stock Purchase Agreement

Preferred Stock Purchase Agreement

  • The mechanism whereby the US government backstops the debt and mortgages of Fannie Mae and Freddie Mac

  • Announced on Sept 7th, 2008. Is part of conservatorship

    “Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and stability to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities.”

  • Initial amounts were $100bn each; later increased to $200bn each.

  • So far, Fannie Mae has drawn on $76bn and Freddie Mac has drawn $51bn. Freddie Mac has not drawn any capital for two quarters.

Government injects amount of capital to make up for shortfall




(incl. principal and interest payments)

New injection takes form of preferred stock, which pays the government a 10% dividend

Department of justice ruling on pspa


Department of Justice Ruling on PSPA

  • “Under the Agreements, following a payment default by a GSE with respect to any Holders, and in the event Treasury fails to perform its obligations to either of the GSEs in respect of any draw on the Commitments, those Holders may file claims in the United States Court of Federal Claims for relief requiring Treasury to pay the relevant GSE a specified amount (called "the Demand Amount") in the form of liquidated damages. After consultation with the Civil Division of the Department of Justice, we conclude that the United States Court of Federal Claims generally would have jurisdiction under the Tucker Act to entertain claims brought by the Holders for liquidated damages, payable to a GSE, according to the terms of the Agreements, if Treasury failed to perform its obligation under the Agreements to fund the Commitment in the event of a payment default by the GSE to the Holders”

Source: US Department of Justice Office of Legal Counsel – Letter from the DOJ to Treasury

Investor behaviour


Investor Behaviour

  • Among non-US accounts, strong opinions on FHLB

    • Europe vs. Asia vs. Asia

  • Among US investors, FHLB / Fannie / Freddie are fungible

  • What drives a customers decision to buy a particular name?

    • Flexibility

    • Cost

    • Tax Advantage

    • Liquidity

    • The Future

  • Changes in investor participation


    Changes in Investor Participation

    Source: Fannie Mae

    What will happen to mortgage finance now


    What will happen to mortgage finance now?

    What the Government will now want:

    Lessons Learned:

    • An appropriately functioning three tiered system to service all homeowners:

      • FHA for lower income

      • GSEs/successors for lower/middle income

      • Private label for jumbo mortgages

    • Protect the taxpayer

    • Support 30yr fixed rate mortgage and TBA market

    • Make implicit guarantee explicit in a cost effective way

    • Require GSEs to be overcapitalized to not only withstand loss but also operate even after a catastrophic loss

    • A model that is more sustainable than the Fed b/s

    • Loose underwriting led to the housing debacle

    • ARMs created more problems than they solved

    • Excessive leverage prevented the GSEs from being effective backstops

    • Implicit guarantee and conflicting mandates encouraged GSE risk taking

    • New entities must have robust capital standards/leverage ratio limits to minimize systemic risk

    Fnma fhlmc









    AS IS

    • New World:

    • Covered Bonds

    • Little or no government involvement

    • Fannie/Freddie wound down

    • Government Guaranteed

    • An entity backed by the government in the business of packaging MBS that meet certain criteria; broader FHA

    • Successor Entities Providing Guarantees

    • Hybrid ownership

    • Utility model regulated returns

    • Private Capital, with government providing catastrophic loss backstop

    2011 and Beyond:






    What will happen to fannie and freddie


    What will happen to Fannie and Freddie

    • Will very likely remain in some form as part of the new structure of mortgage finance. Here’s Why:

      • Know how and technology

      • The ability to act as a buyer of last resort

      • The entrenched, efficient nature of the TBA market

    • Biggest question is what will happen to the portfolios?

      • Very contentious issue

      • Not the cause of huge losses

      • Any future role for portfolios would have to be mission consistent and meet funding hurdles

      • In almost any scenario, the portfolios will shrink significantly

    Threats to fhlb market


    Threats to FHLB Market

    • The dissolution of Fannie and Freddie

    • Implicit vs. Explicit

    • The rise of Supras and Sovereigns

    • Covered Bonds

    • Libor spike

    • “FDIC Risk”

      • Removal of Superlien

      • Taxing FHLB System

    What s the outlook for agency supply


    What’s the Outlook for Agency Supply?

    2010 projected









    Source: Companies and/or their websites

    The supra sov market


    The Supra/Sov Market

    # of Deals

    Deal Value $

    Source: Credit Suisse

    Trades we like fixed to float


    Trades We Like – Fixed to Float

    Fixed to float trades





    Rate (%)


    3-month Libor Fwd Curve

    1yr Fixed @ 1% w/ 5% Cap










    Fixed to Float Trades

    • This is a hypothetical bond with a 1% coupon for a year, that converts to floater thereafter at 3ML+50

    • Bond is callable quarterly after first 3 months

    • This graph reflects hypothetical returns if forwards are met

    Various outcomes for fixed float a simplistic analysis

    Various outcomes for Fixed - Float: A Simplistic Analysis


    What Happens


    Comparable Inv.

    Outperform alternative

    Outperform alternative

    Outperform alternative

    Underperform alternative

    Bond gets called in 3 months

    Bond gets called in 1year

    Bond does not get called

    Bond does not get called and hits the cap

    Make 1% for 3 months

    Make 1% for 1 year

    Make 1% for 1yr, then L+50 until call or maturity

    Make 1% for 1yr then L+50, capped at 5%

    Discount Note at 0.18%

    One year bullets yield 0.58%

    5yr floater issued by GSEs would likely yield about L+10

    5yr floater issued by GSEs would likely yield about L+10

    These outcomes are not conclusive but are broadly representative. There are many possible outcomes

    Key takeaways


    Key Takeaways

    • Investors interest in agencies remains robust

    • However, the future is highly uncertain

    • Although legislative change will come slowly, it will happen

    • Alternatives to GSE market are real

    • Great trades out there to take advantage of Fed forecasts

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