Treasury to Sell Up to $10 Billion of Mortgage Bonds a Month

The U.S. Treasury Department plans to wind down its $142 billion portfolio of mortgage bonds guaranteed by Fannie Mae and Freddie Mac by selling as much as $10 billion per month.

Sales will start this month and be subject to market conditions, the department said today in a statement. When combined with principal repayments currently ranging between $3 billion and $5 billion a month, the sales may eliminate the portfolio in about one year, the Treasury said.

“We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market,” Mary Miller, the Treasury’s assistant secretary for financial markets, said in a statement.

The department began buying mortgage securities after seizing Fannie Mae and Freddie Mac in September 2008 as then- Treasury Secretary Henry Paulson sought to stabilize markets and reduce the cost of mortgages amid the worst global financial crisis and U.S. housing slump since the Great Depression. The Federal Reserve the next year started its own program to purchase $1.25 trillion of agency mortgage securities, acquisitions that ended last March.

Selling the holdings could raise as much as $15 billion to $20 billion in profit, according to a Treasury official who spoke to reporters on condition of anonymity. Price gains for the securities have been fueled by low yields on benchmark government debt and the limited ability of some homeowners to refinance because of falling home prices and tighter credit standards.

State Street Managing

State Street Global Advisors, hired in 2008 to manage Treasury’s mortgage-bond portfolio, will handle the sales, the department said.

The decision to sell the mortgage bonds isn’t related to the U.S. government’s debt ceiling, Treasury said.

Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, supported by $151 billion of taxpayer-funded capital injections since 2008, own or guarantee about half the U.S. mortgage market. In addition to buying mortgage bonds, Treasury also has been purchasing preferred stock in the companies as part of the government bailout.

Consistent Pattern

“This action is consistent with a general pattern of Treasury continued divestment of assets acquired during 2008 and 2009 as part of the various financial stabilization programs,” the department said in the statement.

The sales will have a limited effect on the $5.2 trillion market for agency mortgage bonds, Anish Lohokare, an analyst New York at BNP Paribas, said in an e-mail.

That’s because fewer homeowners have been refinancing loans from the Fed’s pool of mortgage-backed securities, limiting the amount of debt returning to public markets, Lohokare said. The pace at which the Fed’s holdings are being paid down has declined to about $12 billion a month from as much $32 billion last year after home-loan rates rose, he said.

The Fed held about $944 billion of Fannie Mae, Freddie Mac and Ginnie Mae-backed mortgage securities as of March 16, according to central bank data.

About $5 billion of net supply is being created each month through new bond issuance, so the “market can absorb an additional $10 billion,” Lohokare said.

The price of Fannie Mae’s 5 percent 30-year mortgage securities, among the Treasury’s largest holdings, declined 0.17 cent on the dollar more than similar government debt as of 10 a.m. in New York, according to data compiled by Bloomberg.

To contact the reporters on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net; Vincent Del Giudice in Washington vdelgiudice@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

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