State of the GSEs: An Update of the Four Largest Government - - PowerPoint PPT Presentation

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State of the GSEs: An Update of the Four Largest Government - - PowerPoint PPT Presentation

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State of the GSEs: An Update of the Four Largest Government Sponsored Entities California Municipal Treasurers Association April 2012 Rick Phillips Municipal Investment Managers President & Chief Investment Officer

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Rick Phillips

President & Chief Investment Officer

702-932-5330 rphillips@ftnmainstreet.com

State of the GSE’s: An Update of the Four Largest Government Sponsored Entities

California Municipal Treasurers Association April 2012

Municipal Investment Managers

www.FTNMainStreet.com

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Disclosure

The views expressed herein are those of the speaker and do not necessarily represent the views of FTN Financial Main Street Advisors, LLC or its affiliates. Views are based on data available at the time of this presentation and are subject to change based on market and other conditions. We cannot guarantee the accuracy or completeness of any statements or data. The information provided does not constitute investment advice and it should not be relied upon as such. It is not a solicitation to with respect to an investment strategy or investment product and is not a solicitation to buy and/or an offer to sell securities. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizons. All material has been obtained from sources believed to be reliable, but we make no representation or warranty as to its accuracy and you should not place any reliance on this information. Past performance is no guarantee of future results. FTN Financial Group, FTN Financial Capital Markets, and FTN Financial Portfolio Advisors are divisions of First Tennessee Bank National Association (FTB). FTN Financial Securities Corp (FFSC), FTN Financial Main Street Advisors, LLC, and FTN Financial Capital Assets Corporation are wholly owned subsidiaries of FTB. FFSC is a member of FINRA and SIPC— http://www.sipc.org/. FTN Financial Group, through FTB or its affiliates, offers investment products and services. FTN Financial is not registered as a Municipal Advisor.

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U.S. Treasury Public Debt

Trillions

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All This Numbers Deal with the U.S. Debt

2.2%

Avg Interest Rate

Public/Non-Public Debt

62.8 months

Avg Maturity

Public Debt

$454 Billion

FY 2011 Interest Exp.

Public Debt

$6.5 Trillion

Debt Coming Due Next 5 Yrs

Public Debt of the $10.3 billion

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8 Agency Creation Purpose Use of Funds Guarantee Owner(s) FHLB 1932 Restore confidence in the thrift industry Advances (loans) to member banks None; joint and several obligations

  • f the FHLBs (12)

Member banks: 7,781

(as of 9/30/11)

FNMA 1938

(1968)

Provide liquidity to the U.S. mortgage market Purchase mortgage loans "Essentially Guaranteed" by the U.S. Treasury Conservatorship of the U.S. Treasury-

(preferred stock);

FHLMC 1970

(1988)

Increase liquidity to the U.S. mortgage market Purchase mortgage loans "Essentially Guaranteed" by the U.S. Treasury Conservatorship of the U.S. Treasury-

(preferred stock);

FFCB 1971

(1916)

Act as financial intermediary to provide credit to farmers Provide short and long term loans to farms and affliated businesses None; joint and several obligations

  • f the FFCBs (4)

Cooperative of borrowers

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FNMA / FHLMC Timeline

  • Jul 2008: Federal Housing Finance Agency (FHFA) Created
  • Jul 2008: U.S. Treasury Granted Emergency Authority to Assist GSEs
  • Sep 2008: FNMA/FHLMC Placed into Conservatorship
  • Sep 2008: Senior Preferred Stock Purchase Agreement (SPSPA) by the Treasury ($100Bil Each)
  • Feb 2009: U.S. Treasury Raises SPSPA to $200Bil Each FNMA/FHLMC
  • Mar 2009: Fed Announces Program to Buy $200Bil GSE Debt and $1.25Tril MBS
  • Dec 2009: U.S. Treasury Extends/Amends SPSPA – Dec 2012
  • Feb 2011: U.S. Treasury Issues “White Paper” Outlining Three Options for GSE Reform
  • May 2011: Campbell (R-CA) /Peters (D-MI) Bill Introduced in the House of Representatives
  • Aug 2011: S&P Downgrades GSE Senior Debt from AAA to AA+

Campbell/Peters Bill Highlights

  • Encourages Private Sector Investment in the Secondary Mortgage Market
  • Limited Charter for FNMA and FHLMC
  • Limits Taxpayer Liability
  • Accurately Prices Risk
  • Winds down FNMA and FHLMC
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  • US Treasury is permitted to make unlimited investments in FNMA

and FHLMC senior preferred stock through 12/31/12 to maintain positive net worth in GSEs. After year-end 2012, maximum investment is limited to $200B per agency.

  • Senior preferred stock held by US Treasury carries a 10% annual

dividend, payable quarterly.

  • Payment of quarterly dividend to US Treasury for support provided

under SPSPA began in first quarter 2011.

  • Retained portfolio limits were set at $810B per agency as of

12/31/10. Starting in 2011, the portfolio year-end limits were set at 90% of the previous year’s cap.

FNMA/FHLMC Conservatorship Provisions

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U.S. Treasury Support for FNMA/FHLMC

“These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations.” “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in

  • ur financial markets here at home and around the globe.”

U.S. Treasury statement: www.treas.gov/press/releases/hp1129.htm

“… we [the U.S. Treasury] have essentially guaranteed Fannie Mae and Freddie Mac securities ”

U.S. Treasury statement: www.treas.gov/press/releases/hp1301.htm

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Nationalization

  • Fold the GSEs into the federal government, like the FHA, VA, and GNMA.

Privatization

  • Reconstitute the GSEs as private companies with no government support
  • r replace the GSEs with alternative approaches to mortgage finance.

Hybrid Model

  • Combine private capital with some level of government support or

backing.

Bloomberg 4/18/2012

FNMA/FHLMC Possible Reform Scenarios

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Agency S&P LT Moody's LT Fitch LT S&P ST Moody's ST Fitch ST FHLB AA+ (Neg) Aaa (Neg) AAA (Neg)

A-1+ P-1 F-1

FNMA AA+ (Neg) Aaa (Neg) AAA (Neg)

A-1+ P-1 F-1

FHLMC AA+ (Neg) Aaa (Neg) AAA (Neg)

A-1+ P-1 F-1

FFCB AA+ (Neg) Aaa (Neg) AAA (Neg)

A-1+ P-1 F-1

Ratings

“On August 5, 2011, Standard & Poor’s (S&P) lowered the credit rating of long-term U.S. government debt from AAA (the highest possible rating) to AA+. The downgrade reflects S&P’s judgment that (1) the recent Budget Control Act (P.L. 112-25) falls short of what is needed to stabilize the government’s fiscal situation and (2) the capacity of Congress and the Administration to deal with the debt has become less stable, effective, and predictable.”

http://www.fas.org/sgp/crs/misc/R41955.pdf

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$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 2004 2005 2006 2007 2008 2009 2010 2011 Billions

Outstanding GSE Debt Per Issuer

FHLMC FHLB FNMA FFCB

Total Debt Outstanding ($Billions)*

Agency 2004 2005 2006 2007 2008 2009 2010 2011

FHLMC 869 937 952 1,190 1,252 931 796 692 FHLB 952 764 772 805 883 786 794 742 FNMA 733 762 773 774 861 807 729 677 FFCB 98 113 134 154 176 176 187 183 Total 2,653 2,577 2,630 2,922 3,171 2,700 2,506 2,295

*At Year End

Source: RBS

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$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 2004 2005 2006 2007 2008 2009 2010 2011

Billions

Total Outstanding GSE Debt

FFCB FNMA FHLB FHLMC

Percent of Total Debt Outstanding*

Agency 2004 2005 2006 2007 2008 2009 2010 2011

FHLMC 33% 36% 36% 41% 39% 34% 32% 30% FHLB 36% 30% 29% 28% 28% 29% 32% 32% FNMA 28% 30% 29% 26% 27% 30% 29% 30% FFCB 4% 4% 5% 5% 6% 7% 7% 8% Total 100% 100% 100% 100% 100% 100% 100% 100%

*At Year End

Source: RBS

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17 $6 $4

  • $2
  • $59
  • $72
  • $14
  • $17

$2 $2

  • $3
  • $50
  • $22
  • $14
  • $5
  • $100
  • $80
  • $60
  • $40
  • $20

$0 $20

2005 2006 2007 2008 2009 2010 2011

Billions

FNMA/FHLMC Annual Net Income

FNMA FHLMC

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$15 $75 $90 $116 $46 $52 $65 $72

$0 $20 $40 $60 $80 $100 $120 $140 2008 2009 2010 2011 Billions

FNMA/FHLMC Cumulative Draws from U.S. Treasury

FNMA FHLMC $15 $60 $15 $26 $46 $6 $13 $8

$0 $10 $20 $30 $40 $50 $60 $70 2008 2009 2010 2011 Billions

Annual Draws from U.S. Treasury

FNMA FHLMC

Sources: FNMA and FHLMC websites

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U.S. Treasury Support

FNMA FHLMC Total Original Treasury Support 100 100 200 +Additional Treasury Support 100 100 200 Total Treasury Support 200 200 400 Treasury Disbursements Pre 2010

  • 75
  • 51
  • 126

Balance Available 125 149 274 + Estimated Dec 2011 Reserves 75 35 110 Resources Available 200 184 384

  • Est. Value of Non-Performing Loans (Dec 2012)
  • 173
  • 95
  • 268

"Cushion" 27 89 116

Sources: FTN, U.S. Treasury, FHFA

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23 Dividend Scenario

A series of estimates/projections of the next 10 years and how the math of a 10% dividend erodes the amount set aside for post 2012 deficits in net assets. Investors prone to worry will note Fannie Mae's pile of billions runs out in this particular scenario much faster than Freddie Mac's. There are a series of easy steps that Treasury can take as the owner of the preferred to redress an imbalance between the two companies to avoid the absurd circumstance that one has sufficient funds and the

  • ther doesn't.

Estimates: FTN Financial

FNMA 2012 Ending Balance : 124,800 FHLMC 2012 Ending Balance: 149,300

The U.S. Treasury has the authority to modify the dividend provisions.

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67% 68% 70% 47% 41% 40% 58% 73% 72% 70% 73% 13% 9% 8% 7% 4% 4% 5% 22% 25% 26% 25% 20% 23% 22% 46% 55% 56% 37% 5% 3% 4% 2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Private GNMA FN/FR

U.S. Mortgage Market Share-MBS Issuance Volume

Source: FHFA Conservator’s Report 4th Quarter 2011

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FNMA Portfolio Chg Net Issuance Outstandings % Chg in Outstandings 2009

  • 15
  • 97

786

  • 11%

2010 16 11 797 1% 2011

  • 80
  • 53

744

  • 7%

2012 Est

  • 66
  • 78

666

  • 10%

Total

  • 145
  • 217
  • 25%

FHLMC 2009

  • 49
  • 50

807

  • 6%

2010

  • 58
  • 79

729

  • 10%

2011

  • 44
  • 51

677

  • 7%

2012 Est

  • 75
  • 75

603

  • 11%

Total

  • 226
  • 254
  • 30%

FHLB 2009

  • 319
  • 321

931

  • 26%

2010

  • 106
  • 134

796

  • 14%

2011

  • 120
  • 105

692

  • 13%

2012 Est

  • 83
  • 83

609

  • 12%

Total

  • 628
  • 642
  • 51%

FNMA, FHLMC, FHLB Total 2009

  • 383
  • 468

2,524

  • 16%

2010

  • 149
  • 202

2,322

  • 8%

2011

  • 244
  • 208

2,113

  • 9%

2012 Est

  • 223
  • 235

1,878

  • 11%

Total

  • 999
  • 1,114
  • 37%

Recent and Projected Net Issuance by Year ($bn)

Source: RBS, FNMA, FHLMC, FHLB 200 400 600 800 1000 1200 1400 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Est $bn FNMA FHLMC FHLB

Agency Supply is Declining

Expect net issuance of -$235 bn in 2012 vs. - $208 bn in 2011 driven by declines in the GSE’s portfolios. If realized net issuance since 2009 would total

  • $1.1 trillion shrinking outstandings by 37%.

We currently project gross 2012 issuance of about $821 bn vs. $993 bn in 2011.

Gross Non-Discount Note Issuance by Year

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Approximately $120,000 per person

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Bloomberg's NIM2 (New Issue Monitor Page) March 19 - April 16

Agency # of Issues Amt Issued (Bil)* Avg Size ($Mil) Bullets Calls Step-Ups FRNs Key Points FHLB 290 $23.3 $80.3 53 93 138 6 Most issues and amount FNMA 98 $7.7 $78.8 66 32 No bullets FFCB 67 $6.5 $96.8 22 38 7 Calls all continuous FHLMC 9 $6.4 $711.1 2 7 2 Bullets: $3Bil each Totals 464 $43.9 $94.6 77 204 170 13

Recent Agency Issuance

$6.4 $6.5 $7.7 $23.3

$0 $5 $10 $15 $20 $25 FHLMC FFCB FNMA FHLB Amount Issued - $Billions

9 67 98 290

50 100 150 200 250 300 350 FHLMC FFCB FNMA FHLB Number of Issues

*Does not include discount note issuance

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Percent

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Spreads are Tight!!

Bloomberg Description Page Message from Broker

Matched Maturity Treasury Yields

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5 10 15 20 25 30 35 40 45

4/1/11 4/15/11 4/29/11 5/13/11 5/27/11 6/10/11 6/24/11 7/8/11 7/22/11 8/5/11 8/19/11 9/2/11 9/16/11 9/30/11 10/14/11 10/28/11 11/11/11 11/25/11 12/9/11 12/23/11 1/6/12 1/20/12 2/3/12 2/17/12 3/2/12 3/16/12 3/30/12 4/13/12 4/27/12

Basis Points

2 Year Sector

2y-1y-1x Call Spd to Tsy 2y Bullet Spd to Tsy 10 20 30 40 50 60 70 80

4/1/11 4/15/11 4/29/11 5/13/11 5/27/11 6/10/11 6/24/11 7/8/11 7/22/11 8/5/11 8/19/11 9/2/11 9/16/11 9/30/11 10/14/11 10/28/11 11/11/11 11/25/11 12/9/11 12/23/11 1/6/12 1/20/12 2/3/12 2/17/12 3/2/12 3/16/12 3/30/12 4/13/12 4/27/12

Basis Points

5 Year Sector

5y-1y-1x Call Spd to Tsy 5y Bullet Spd to Tsy

Source: Bloomberg / FTN Financial