martes, junio 21, 2005

MBS tiene la culpa?

Sobre la pregunta.."por qué los bancos, principalmente en USA, siguen otorgando hipotecas?" Una posible respuesta: "el riesgo por esos préstamos no permanece en los bancos"....los bancos arman MBS (mortgage backed securities) que comercializan entre instituciones que sí tienen apetito por este riesgo...entonces: "los bancos están sobre otorgando hipotecas?"...quienes compran estos estructurados....los que primero las compran son los GSE (government sponsores entreprises...tipo fannie mae...freddie mac) quienes constituyen la base del mercado secundario de las hipotecas...

If the secondary mortgage market either did not exist or perhaps was not as careless with its government-sponsored economic liquidity injections, would banks have the bandwidth to loan at such rampant rates, to create such maniacal loan packages or have the knack to approve loans so quickly and effortlessly? The answer is absolutely not!

There would be more accountability on the issuing front and financial institutions would think twice about what they had in their books. If this were the case, home loans would have been harder to come by and housing prices may not have risen so hastily perhaps preventing this dangerous Real Estate bubble. In my opinion, today’s Real Estate bubble could not have spawned to life without the help of the GSEs and their synthetic injection of liquidity into the housing market and the economy as a whole.

Today’s Real Estate bubble has propelled Fannie Mae and Freddie Mac to become two of the largest financial institutions in the world. Their presence in today’s financial markets is dominating as they play a monstrous role in the debt and derivatives markets. Today’s housing and refinancing boom along with the GSEs’ aggressive push to grow their portfolios has created a monster of epic proportions. To show you how this monster is being fed, we need to understand how funds flow in this market.

If anyone has obtained a new mortgage loan or refinanced an existing loan in recent years, which according to statistics most everyone has, you have likely seen your loan change hands multiple times amongst various financial institutions. Before the existence of the secondary mortgage market, when a financial institution issued a home loan, that loan was on its books as risk and liability and limited the availability it had to issue additional loans based on a ratio of its net financial assets to current liabilities.

Today, this primary issuer is able to sell this loan to the secondary mortgage market and relinquish its liability from its books. There are other minor players in the secondary mortgage market, but the major market makers, Fannie Mae and Freddie Mac, are the Oz’s behind the curtain of most mortgage loan purchases from originating financial institutions.

As the GSEs purchase these mortgages from the primary market lenders it allows these primary lenders to continue to originate and pump out additional loans to the public. With record low interest rates among many factors spurring demand for mortgage origination and refinancing, the primary mortgage market has been able to feed this monster gargantuan portions.

Among Fannie Mae’s Fed-driven corporate initiatives is to “…improve the liquidity of the mortgage market for consumers and investors.” Mission accomplished! With the government’s help, the GSEs have indeed increased the flow of funds in the economy by creating liquidity in order to enhance consumer spending temporarily heading off a recession, but at what cost?

Fannie and Freddie are able to fund the purchases of these primary market mortgages by issuing debt to the public via the bond markets. One of the extra-special benefits of being a GSE is they can borrow, with virtually no limits or volume restrictions, at cheaper rates compared to other top debt-rated companies. They have this capability because investors tag these bonds nearly as safe, if not as safe, as Treasury debt. With the spread between their ultra-low borrowing rate and the interest rates on the loans they house, they have a continual cash flow that provides them with further expansion opportunity for their portfolios. What a fantastically easy way to make money! Almost like growing it on a tree.

The investment vehicles Fannie and Freddie use to flood the bond markets are called Mortgage Backed Securities (MBS). An MBS is comprised of a pool of mortgages that serve as the underlying asset providing principal and interest payments passed through to investors. The GSEs sell claims to the principal and interest payments generated from this pool of mortgages in the open bond market, while fully guaranteeing the funds to the investor.

Currently, Fannie and Freddie are liable for over $3 trillion dollars of outstanding debt securities to the markets. Folks, our national debt is at $8 trillion. How is it possible that Fannie and Freddie can accumulate debt of their own that is nearly 40% of our nation’s debt? Keep in mind an MBS carries a guarantee from the issuer to the investor on its payment, regardless of the cash flow generated from the underlying assets. $3 trillion dollars is a lot of money to have at risk with the assumption the underlying cash flow will always be there!

You may ask yourself how they can possibly issue so much debt and where the demand comes from. Many mutual funds, commercial banks, pension funds, local governments, foreign Central Banks, etc provide ample demand for GSE debt. In most cases these institutional investors use it in their fixed-income portfolios as a replacement for U.S. Treasury debt because they get a little higher yield and deem it just as safe.
......y sigue...............