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Mortgage REITs to Benefit from Restrictions on Fannie Mae Portfolio
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Mortgage REITs to Benefit from Restrictions on Fannie Mae Portfolio
Fannie Mae's settlement with OFHEO, announced this week, limits Fannie Mae's
mortgage portfolio to $727 billion, the level reached 12/31/2005. This ceiling
takes effect immediately. No action by Congressional committees is required.
Comments from a Treasury Department official seem to indicate that
the Treasury Department is pleased to see that the restriction on Fannie Mae's
mortgage portfolio is now in place.
Management of Fannie Mae has acknowledged that they must institute
procedural changes to control portfolio growth. We think there are important
positive implications for Mortgage REITs in this news.
1) Fannie Mae will retain fewer mortgages.
In the short term, this will mean more liquidity in the market
for securitized loans. At first there may be too much supply at the low yield
end of the market, as Fannie Mae steps up divestitures, implying lower yields for
new securitizations of conforming loans. At the same time, we think higher yielding
securitizations from non-conforming Mortgage REIT originators
may receive more of a premium. A wider gap between
the low yield and high yield end of the market will provide more trading
opportunities, another benefit for Mortgage REITs.
2) Fannie Mae's purchases of conforming mortgages will decline.
This will force more borrowers into non-conforming loans, implying
MORE ORIGINATION VOLUME for Mortgage REIT originators.
Many banks and mortgage brokers only offer conforming loans, relying
on Fannie Mae to buy those conforming mortgages from them so that
they can continue to lend. In acting as buyer for conforming loans,
Fannie Mae provides capital to the mortgage industry. Now that
Fannie Mae is restricted, volume must shift to other originators.
As this restriction on Fannie Mae has been placed at a time when mortgage originations
were already down from the previous year, it seems to us that no negative
implication for the supply of capital for mortgage loans may be drawn. We see a
a shift in market share to non-conforming loans, not a market decline.
Financial REITs that are mortgage originators include New Century Financial NEW,
NovaStar Financial NFI, Thornburg Mortgage TMA, Saxon Capital SAX,
Impac Mortgage Holdings IMH, HomeBanc HMB, Fieldstone Investment FICC,
and American Home Mortgage Investment AHM. These Mortgage REITs
also securitize non-conforming mortgages and should benefit from a widening
gap between low yield and high yield securitizations.
For the short term, we may see additional pressure on net interest
margins for those Mortgage REITs that just buy and hold securitizations.
Eventually, once Fannie Mae has completed its initial round of portfolio
divestitures, a higher yield on ARMs would benefit the "agency spread" portfolios
of Mortgage REITs such as MFA Mortgage MFA, Annaly Mortgage Management NLY,
KKR Financial KFN, Opteum OPX, and Capstead Mortgage CMO.
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