A Real Fannie Spanking
Fannie Mae (FNM, news, msgs), the biggest supplier of capital to the mortgage market, announced today it will institute reform demanded by the Office of Federal Housing Enterprise. One result, according to Gray, may well be that Fannie Mae sells $100 billion a year in mortgages over the next 12 months instead of adding $100 billion in mortgages.
That could push mortgage rates from about 5.75% now to perhaps 6.25%, Gray said on CNBC today. And, if long-term rates start to rise overall, the jump could even be bigger. “Theoretically, that could precipitate lower home prices,” he added.
Under the agreement with OFHEO, Fannie Mae will increase, within the next 270 days, its cushion of reserve capital against risk to 30 percent above its core capital of some $30 billion. The reserve level currently is at 18 percent above that core level, according to the company. The company also will recalculate all its transactions for derivatives, financial instruments it uses to hedge against interest-rate and other risk, for all quarters going back to 2001.
To raise the approximately $5 billion needed to fill the gap in reserves, Fannie Mae could issue new stock, a move that could further weaken its share price; sell assets from its portfolio of investments, which in addition to billions in mortgages includes such items as aircraft leases; or even scale back its purchases of home mortgages from lenders for resale as bonds on Wall Street, which could reduce the supply of home loans for prospective buyers.
And that would really drive up interest rates...
That could push mortgage rates from about 5.75% now to perhaps 6.25%, Gray said on CNBC today. And, if long-term rates start to rise overall, the jump could even be bigger. “Theoretically, that could precipitate lower home prices,” he added.
Under the agreement with OFHEO, Fannie Mae will increase, within the next 270 days, its cushion of reserve capital against risk to 30 percent above its core capital of some $30 billion. The reserve level currently is at 18 percent above that core level, according to the company. The company also will recalculate all its transactions for derivatives, financial instruments it uses to hedge against interest-rate and other risk, for all quarters going back to 2001.
To raise the approximately $5 billion needed to fill the gap in reserves, Fannie Mae could issue new stock, a move that could further weaken its share price; sell assets from its portfolio of investments, which in addition to billions in mortgages includes such items as aircraft leases; or even scale back its purchases of home mortgages from lenders for resale as bonds on Wall Street, which could reduce the supply of home loans for prospective buyers.
And that would really drive up interest rates...
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