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.
“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.
Separately today, KeyCorp and SunTrust Banks Inc. planned to sell at least $2 billion of senior debt to pay back capital injections under the Treasury’s Troubled Asset Relief Program.
State Street Global Advisors, hired in 2008 to manage Treasury’s mortgage-bond portfolio, will handle the sales, the department said.
Deciding to sell the mortgage bonds, which were purchased with proceeds from U.S. government debt sales, isn’t related to the country approaching its maximum debt limit, Treasury said. The department has estimated that limit may be breached sometime between April 15 and May 31. Marketable U.S. debt outstanding totals about $9.04 trillion.
Government Debt Ceiling
“While the Treasury said that this action was not prompted by the approaching debt ceiling, we see this as one of many tools that can be used to address this issue,” New York-based Citigroup Inc. analysts Brett Rose and Joe Leary said today in a report.
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 their government bailouts.
The Treasury’s 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.
The nature of Treasury’s mortgage bond holdings mean the sales will have a lesser effect on Fannie Mae and Freddie Mac securities trading closest to face value, meaning the sales will have a limited influence on home-loans rates, JPMorgan Chase & Co. analyst Brian Ye said in a note to clients. The offerings also will push down the extra amount investors pay to purchase older mortgage-bond pools, Ye said.
About $5 billion of net supply of agency mortgage bonds is being created each month through new bond issuance, so the “market can absorb an additional $10 billion,” Lohokare said.
Net issuance has fallen in recent years as consumers defaulted and borrowed less as property values and home sales dropped. The market expanded by a monthly average of almost $38 billion from 2006 through 2009, according to Citigroup data. Last year, net supply totaled negative $153.7 billion as Fannie Mae and Freddie Mac bought back delinquent loans.
The price of Fannie Mae’s 5 percent 30-year mortgage securities, among the Treasury’s largest holdings, declined less than 0.18 cent on the dollar more than similar government debt as of 5 p.m. in New York, according to data compiled by Bloomberg. The debt closed at 104.64 cents on the dollar.
Fannie Mae’s current-coupon bonds, or those trading closest to par, carrying 30-year fixed rates yielded 0.84 percentage point more than 10-year U.S. government debt, up from 0.83 percentage point at the end of last week and down from a 2011 high of 0.90 percentage point on March 16, Bloomberg data show.
Nomura Securities International Inc. responded to today’s Treasury announcement by ending a prediction the spread would narrow over the longer term, according to a note by analysts Ohmsatya Ravi and Ankur Mehta. The extra supply of bonds will challenge a market already facing lower demand from Japan as that country contends with earthquake-related costs, the analysts said. Bank demand for the securities may also decline because of a Fed decision last week allowing lenders to use capital to pay dividends and buy back shares, they said.