WASHINGTON — Corporate credit union officials are reporting that the Treasury's bailout of Fannie Mae and Freddie Mac could rebound the value of mortgage-backed securities owned by the corporates.
Banks invested heavily in the government-sponsored entities' preferred stocks and are second in line behind common stock investors to absorb the GSEs' massive losses. Upon news of the takeover, all Fannie and Freddie preferred stockholder dividends have been suspended, prompting Standard & Poor's to cut their ratings to junk grade.
Thanks to regulators, corporates won't lose out; they weren't even allowed to play the game.
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"By regulation, we're not permitted to buy preferred stock, so I can speak on behalf of all corporates: none of us will experience those losses," said Tammy Cantrell, senior vice president of asset liability management at the $3.8 billion Corporate One Federal Credit Union.
Corporate One does have some Fannie and Freddie exposure, Cantrell said, but it's through the backing of mortgage-backed securities. The takeover means the federal government improved the guarantee on the investments from implicit to explicit.
"The market value on those, in my estimation, should have improved," Cantrell said.
US Central Credit Union spokesperson Jill Stockham agreed, saying the GSE takeover means the $41.3 billion corporate's Fannie and Freddie-backed MBS portfolio "could definitely regain value." At press time, however, news of the bailout was too recent for US Central to release updated numbers.
U.S. Central also gained Treasury backing on nearly $2.5 billion in Fannie and Freddie bonds, Stockham said.
Constitution Corporate Federal Credit Union's Dan Poulin, senior director of business development and marketing, said overall, the Treasury guarantee on Fannie and Freddie debt is "a major positive for the embattled mortgage market." However, he said it's premature to comment on whether the move would add value to the $1.7 billion corporate's investment portfolio or prompt Fitch to remove a current negative ratings watch from its otherwise stellar debt ratings.
"This news could possibly have a positive affect on our future ratings, but it is too early to know for certain," he said.
Not only are banks experiencing losses on Fannie and Freddie preferred stock, but many of them had earmarked the investment vehicles as risk-based capital. While corporates would like more capital raising choices, Cantrell said, they already have some alternative capital options.
"As a corporate network, we can raise capital through member paid-in capital or member capital shares," Cantrell said. "Unfortunately, natural person credit unions can only raise capital through retained earnings, so we do have a couple of options that they don't."
Brian Turner, Southwest Corporate investment services advisory director, said, "Many analysts expect that rates on conventional fixed-rate mortgages could fall between 25 to 30 basis points over the next few months, yet, underwriting standards could tighten even more."
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