The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
If you had not have fallen
Then I would not have found you
Angel flying too close to the ground
And I patched up your broken wing
And hung around a while
Tried to keep your spirits up
And your fever down
- Willie Nelson
The Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, extended portfolio caps for the twins going forward last month. Specifically, they initially capped ownership of mortgages at $900 billion each in December 2009 and have now determined that cap should be reduced by 10 percent each year until it reaches just $254 billion in 2021.
Apparently, they believe housing’s “broken wings” have been healed.
The relevance of these numbers should be apparent at a time when investors are shying away from mortgage paper — especially that which does not carry a government guarantee.
In the chart nearby you can see the twin’s combined exposure over the last several years along with the total portfolio limits in 2010 and 2011.
Source: Stone & McCarthy Research Associates
It’s interesting to note the growth of the twins during the liquidity crisis of late 2008. As the buyer of last resort, it was up to the government, through the twins, to support the housing sector.
You might see the decline since then as a positive, suggesting private sector borrowing has returned. However, the Treasury and the Fed built positions over the last couple years of $250 billion and $1.2 trillion respectively. Put another way, the U.S. government, through the twins, the Treasury and the Fed, now own approximately $4 trillion in mortgage debt.
That’s the equivalent of one in every 3.5 mortgages across the country!
Though we continue to have a lack of appetite from the private markets for mortgage debt, the FHFA is continuing with its plan to force the twins to pare down their holdings. With no solution to the mortgage problem on the horizon, these forced sales will make it more difficult for the Fed and Treasury to get out of their positions.
The unfortunate truth is we have no natural investors for this $14 trillion sector due to the uncertainty in Washington with regard to regulation, investment and tax considerations. Not only that, but we aren’t even having the discussion yet.
Prior to the crisis — and considering the twins had independently elected boards and were, therefore, not run by the government — the U.S. government owned approximately zero mortgage loans. If the explosion to a 29 percent ownership rate has helped support the housing market in the near term, what will a prematurely forced reduction accomplish?
Reducing the government’s activity in the mortgage sector before setting the new “rules of the game” is suicide for the housing sector.
As someone highly familiar with government involvement, Willie Nelson’s quote above applies here. But we shouldn’t release the mortgage market back into the wild until more work is done in Washington.
Service industries expanded last December at the fastest pace since May 2006, showing the U.S. economic recovery will extend through 2011. The ISM non-factory index, which covers about 90 percent of the economy, rose to 57.1 for December.
American factories received more orders in November, climbing 0.7 percent for the month. Orders for capital goods like computers rebounded after falling the previous month. This signals that business investment and exports could be sustained in 2011.
Nonfarm payrolls increased 103K for December, well below consensus estimates of 150K. However, revisions for previous months did show an increase of 70K in jobs. The jobless rate dropped to 9.4 percent, from 9.8 percent the previous month.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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