The coronavirus crisis has systematically suspended large pockets of the mortgage universe. While private lending is still ongoing (albeit at a much reduced level), government-backed lending has again become pretty much the only game in town. The Mortgage Bankers Association reported that the availability of mortgage credit is at its lowest in six years, reminiscent of the consequences of the financial crisis. So, how healthy is the biggest player in the mortgage market, and what does the future look like?
Fannie Mae (OTC: FNMA) reported first-quarter profit of $ 461 million, but the main focus is on the forbearance issue, meaning borrowers are allowed not to pay off their mortgages for up to a year, roughly without ask questions. At the end of April, 7% of Fannie Mae’s mortgage portfolio was in forbearance. Its basic forecast is that 15% of all its loans will be subject to some kind of forbearance.
The loan manager will need to cover the first four payments, but after that, Fannie Mae will need to ensure that holders of Mortgage Backed Securities (MBS) are paid. It’s going to take a lot of money. Additionally, Fannie Mae took a $ 4.1 billion allowance for credit losses between multi-family and single-family mortgages.
The economic outlook is bleak for the second quarter
The company’s economic forecast included a 25% drop in annualized GDP in the second quarter, followed by a recovery in the second half. GDP for the year 2020 is expected to drop by around 3%, then increase by 5% in 2021. Unemployment is expected to peak at 15% (which we have already achieved, according to the latest jobs report). If forbearance numbers hit the expected 15%, Fannie Mae will almost certainly have to dip into treasury cash to make the advances to MBS holders. The government has been used to Fannie Mae paying it, and it will almost certainly be called a bailout. It’s an election year, and we’ll be at the heart of it five months from now when Fannie Mae can no longer count on services to advance payments to investors.
Forget the IPO for a while
The forbearance issue will almost certainly delay Fannie Mae’s release from trusteeship. Since distributing all of her profits directly to the Treasury until recently, Fannie Mae has not been able to build up a large enough capital cushion to cope with a crisis like this. This means that he will need more support from the government and delay what was supposed to be the biggest IPO ever. Whatever happens with Fannie Mae, it won’t be bullish for the title. If you like it as a business and business (and there’s a lot to like about it), review it when it finally ends. becomes public.
Fannie Mae’s current trading stock shouldn’t even exist. The company was bailed out in the 2008 crisis and is a ward of the state. The government left 20% of the stock in circulation simply because it didn’t want to be forced to consolidate Fannie Mae’s debt on its balance sheet. To let Fannie Mae (and Freddie Mac) fail in 2008 would have meant the complete collapse of the US mortgage market.
Instead, the government took just under 80% of the equity through preferred stock and basically agreed to back the company as needed to keep the mortgage market alive. The current shareholders of Fannie Mae exist simply for the convenience of government. No matter where it is traded, it should be seen as nothing more than a litigation lottery ticket – in other words, the only way for the stock to have lasting value is if a judge forces the government to include existing shareholders in the new state-owned company.
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