Market Mover - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchUS: Impacts of HARP 2.0 on Agency Debt• Though we do not expect HARP 2.0 toproduce a “nuclear” refinance wave, ourmortgage analysts are predicting a moderateprojected pick-up in prepay speeds of highercoupon, older vintage MBS. These high coupon,seasoned mortgages are heavily represented inFannie and Freddie’s retained mortgageportfolios.• One impact of this targeted increase inprepays is that it will accelerate the contractionof Fannie and Freddie’s retained portfolios. As aresult, their overall funding needs will bereduced as these assets shrink.• This should intensify the trends in theagency debt market of the past 2 years - furthershifting Fannie and Freddie’s debt compositiontowards longer term, non-callable debt to matchthe longer duration, lower convexity profile ofthe retained portfolio.A re-focusing of Fannie and FreddieThe HARP program was not introduced to changethe structure or market impact of Fannie andFreddie’s business model, but it may accelerate theirtransition or wind-down from mortgage investmentcompanies to more streamlined, single-purposemortgage guarantors.When Fannie and Freddie were originally placed intoconservatorship in September 2008, the preferredstock purchase agreement that the GSEs enteredinto with the Treasury required that the organisationsshrink their retained mortgage portfolios until theywere below UDS 250bn. The mechanism thatTreasury chose to implement this provision was toput a “hard cap” on the year-end size of the portfoliosthat declined by 10% per year.The 2008 year-end cap for each GSE was UDS 900billion (shown in Chart 1, along with Fannie Mae’smortgage portfolio and debt outstanding). At thattime, Fannie’s retained portfolio was below UDS800bn so the cap was not constraining. Setting the2008 cap at UDS 900bn, implied a 2009 cap of UDS810bn (90% * UDS 900bn), a year-end 2010 cap ofUDS 729bn (90% * UDS 810bn) and so on. In fact, in2009 the Treasury adjusted the agreement, keepingthe year-end 2009 cap at UDS 900bn so the GSEshad ample “room” to buy-out delinquent loans fromtheir securitized pools. The spike in Chart 1 thatAmount (in billions)Chart 1: FNMA Mortgage & Debt Portfolios920900880860840820800780760740720700680660640Jan‐08Mar‐08Jun‐08Sep‐08Source:bnP ParibasDebt Outstanding (in billions)440420400380360340320300280260240220200180160140120Jan‐08Dec‐08Mar‐09Jun‐09Sep‐09Dec‐09Mar‐10shows the quick increase in the portfolio from UDS725bn to UDS 820bn is a result of those buyouts.Therefore, 2010 became the first year of the forcedshrinking with the year-end cap of UDS 810bn. Thisyear’s cap is UDS 729bn, which Freddie is wellbelow but which Fannie just dropped under in JulyJun‐10Sep‐10Dec‐10Mar‐11Total Debt OutstandingGross Mortgage PortfolioYE 08 capYE 09 capYE 10 capYE 11 capYE 12 capJun‐11Sep‐11Dec‐11Chart 2: FNMA Debt CompositionApr‐08Jul‐08Source:bnP ParibasOct‐08Jan‐09Apr‐09Jul‐09Oct‐09Jan‐10Apr‐10Jul‐10Oct‐10Mar‐12Jan‐11Jun‐12Short term debtCallable long term debtNoncallable long term debtTable 1: FNMA Debt YTD Changes(amounts in millions)YTDDec-09 Dec-10 Aug-11 changeShort term debt 200,567 152,013 189,371 37,358Callable debt 210,181 219,804 150,710 (69,094)Noncallable debt 375,027 422,061 402,218 (19,843)Short term debt % 26% 19% 26% 6.4%Callable debt % 27% 28% 20% -7.4%Noncallable debt % 48% 53% 54% 1.0%Total Debt Outstanding 785,775 793,878 742,299 (51,579)Source:bnP ParibasApr‐11Sep‐12Jul‐11Mary-Beth Fisher 27 October 2011Market Mover31www.GlobalMarkets.bnpparibas.com