00:00Fannie Mae and Freddie Mac have added billions of dollars of mortgage-backed securities and home
00:05loans to their balance sheets in recent months. That's adding to speculation they're trying to
00:10lower lending rates and boost profitability ahead of a potential secondary offering.
00:15Bloomberg's Scott Carpenter covers credit and joins us here on set. Scott, great to have you on
00:20the program. This is a story that has been persistent because Bill Ackman often tweets
00:26about Fannie and Freddie, the president, and those around him talk about it a lot. But for many
00:31people, what these companies do, these government-related entities, is kind of nebulous.
00:39So step back and explain exactly what the story is. Yeah, absolutely. So Fannie and Freddie are
00:45enormous government-sponsored companies. They're designed to support the market for home loans
00:51and ultimately make it easier to buy, to take out mortgages. They underwrite something like
00:56more than half of all mortgages in America. So they're enormous, right? The main thing they do
01:01is they provide a financial guarantee on mortgage bonds. That's how most of these home loans get
01:08financed. That's the main thing they do. They also, and this is the part that's not talked about quite
01:13as much. They also buy some of those mortgage bonds and home loans themselves. By doing that,
01:22they can support the market and also earn revenue for themselves. They get money from providing the
01:29financial guarantee. They charge money on that. They also get money when they buy the mortgage bonds.
01:34So it's sort of like, for them, it's called their investment portfolio or their retained portfolios.
01:40This is in addition today to their main business of providing the financial guarantee. And what's
01:46been happening and what we wrote about is that since June, between June and October, they've increased
01:54that investment portfolio by about 25%. It's now roughly $233 billion. That's a lot. The agency mortgage
02:05bond market is enormous. It's about $9 trillion. So still, you know, it's still, it's not the whole
02:12thing by any stretch, but it's growing. And what people are talking about, all strategists, a lot of
02:18investors I talked to are talking about is that they, it could, it's, it's on a trajectory to continue
02:25growing into next year. Citigroup is expecting them to add $100 billion. There's, there's a wide range,
02:33nobody knows exactly what they're going to do because Fannie and Freddie and their regulator,
02:38the FHFA have been tight-lipped about this. So, but, but let me ask, clearly if they buy mortgage
02:44bonds, um, that'll push the rate down, right? Price up, yield down. Yeah. Um, but why would they want to
02:52keep lending costs down and grow their portfolio as a precursor to what's being called an IPO?
02:59Although obviously it's not an initial public offering since the shares are already pretty
03:04public. Right. To, to do an IPO, which is why the Trump administration is clear, they, they would
03:10like to, to do, the GSEs, Fannie and Freddie, need to have really good earnings. If you're an,
03:18if you're going to invest in an IPO, if you're going to buy shares of a company that are being offered
03:23publicly, you want that company or in this case companies to be very profitable. So you want them
03:30to be quite profitable, right? And this way, by increasing the investment portfolios, you are,
03:36you're increasing the earnings, although it's, you know, it's depends on what your funding costs
03:40are and so on, but that could be what's going on here. They, they have the IPO in mind as well
03:46as other possible objectives like lowering mortgage rates. And they're thinking, how do we make this
03:50possible? One way to do that could be buying more, buying more mortgage bonds, mortgage loans,
03:57increasing their earnings, presenting better profitability so that when it comes time to do
04:03an offering, investors like what they see.
Comments