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- Index number:
- 000014453-2019-0044
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- Dispatch date:
- 2010-07-16
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- Publish organization:
- State Administration of Foreign Exchange
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- Exchange Reference number：
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- Name：
- Q & A on U.S. Fannie Mae and Freddie Mac
Editors notes: Our administration has published questions and answers about popular topics regarding foreign exchange management policies in periodicals and has analyzed and interpreted ideas and concepts relating to foreign exchange management in response to questions of public concern about foreign exchange management and foreign exchange reserves. This move has been widely acknowledged and welcomed by the media and the general public. With the deepening of the reform and opening up, the general public is becoming more closely involved in foreign exchange business. Therefore, we will continue to popularize knowledge about foreign exchange management and interpret the relevant policies, so that the general public will understand foreign exchange management in plain language.
As for the recent de-listing of Fannie Mae and Freddie Mac (hereinafter referred to as Fannie and Freddie) from the New York Stock Exchange (NYSE), we have clearly stated in early remarks that our foreign exchange reserves did not invest in Fannie and Freddie stocks. The bond prices for Fannie and Freddie are stable and repayments for the investment and interest are being made according to schedule. Some readers hope to know more about Fannie and Freddie as well as to learn about the stocks and bonds of the two companies. Therefore, our administration has compiled some questions and answers about relevant information for your reference.
Q1: What kinds of enterprises are Fannie and Freddie? How are they positioned in the American financial system?
A: Fannie and Freddie are the two biggest mortgage lenders in the United States, i.e., the Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corporation (Freddie Mac). Fannie and Freddie are government-sponsored enterprises established through legislation by the U.S. Congress. The legislation is aimed at providing stable and constant support to the housing mortgage loan markets and improving the accessibility of home mortgage loans.
The businesses operated by the two companies play an important role in American housing policy. U.S. housing policy is public. After the Federal Home Loan Bank System was established in 1932, a secondary market of housing mortgages came into being, with Fannie and Freddie as the primary players and private mortgage finance agencies as supplementary players, to provide financial security for housing construction by combining government intervention and market-oriented operations. Fannie and Freddie are the pillars of the American real estate market. Real estate loans underwritten or purchased by the two companies account for 50 percent of the American real estate market; this figure reached over 80 percent after the outbreak of the sub-prime lending crisis.
Fannie and Freddie are not only important to the American real estate market, but also are crucial to the stability of the financial market. The assets owned or guaranteed by the two companies total about USD 5.5 trillion. Over 70 percent of the bond investors in Fannie and Freddie are American investors, such as pension funds, mutual funds, commercial banks, and insurance companies, which are of overriding importance to the U.S. financial system.
At the initial stage after the outbreak of the sub-prime lending crisis, the U.S. Government still relied on these two companies to alleviate the crisis and it adopted such measures as lowering their capital requirements and expanding the maximum single loan limit to enhance their role in resolving the crisis. With the deepening of the crisis, the American real estate market experienced dramatic changes; furthermore, due to poor management, the two companies encountered problems. Therefore, the U.S. Government took over Fannie and Freddie, indicative of its support for the companies. At present, in addition to the injection of USD 145 billion in the preferred stocks of Fannie and Freddie by the Treasury, the U.S. Government has promised limitless injections for the two companies by 2012 to offset net losses. Thereafter, the two firms may still apply to the Treasury for injections within the limit of USD 200 billion respectively. In addition, the Federal Reserve and the Treasury purchased a total of over USD 1.4 trillion of Fannie and Freddie bonds, accounting for 25 percent of the total assets owned and guaranteed by the two companies, thus making them the biggest bond holders of Fannie and Freddie.
The U.S. Government has promised on several occasions that the capacity of Fannie and Freddie to repay relevant debts in the face of any future reforms will be guaranteed. During the recent second round of the Sino-U.S. Strategic and Economic Dialogue, the U.S. Government stated it will continue to enhance supervision over government- sponsored enterprises so as to ensure that they have adequate capital and a capacity to carry out their financial liabilities. The U.S. Government will listen to all stakeholders and adopt proper measures to further reform so as to ensure that government- sponsored enterprises have the capacity to fulfill their liabilities.
Q2: What about the stocks issued by Fannie and Freddie? Why were they de-listed?
A: Fannie and Freddie were listed on the New York Stock Exchange in 1970 and 1989 respectively and Fannie Mae was also listed on the Chicago Stock Exchange. In addition to preferred stock, the amount of Fannie and Freddie common stocks totals about 1.14 billion and 0.65 billion respectively. During the ten years before the 2007 sub-prime lending crisis, the share price of the two companies remained at USD 50-70 per share and the dividends were distributed regularly; therefore, the stocks were popular with investors. After the outbreak of the sub-prime lending crisis, Fannie and Freddie suffered heavy losses due to the continuous slowdown in the American real estate market and their share prices declined dramatically. With the deepening of the crisis, the U.S. Government took over the two companies and their share prices fell to lower than USD 1. Thereafter, their share prices fluctuated around USD 1 for a long time.
Since this mid-May, the average closing price of Fannie Mae has been lower than USD 1 for thirty consecutive trading days. According to the regulations of the New York Stock Exchange, under such circumstances the company may choose to de-list or to adopt measures such as a reverse split so as to restore the share price to over USD 1. The U.S. Government, the biggest shareholder of Fannie and Freddie, held 80 percent of the total shares, whereas the market value of the shares held by other shareholders was no more than USD 1 billion. Actually, Fannie and Freddie were no longer operated under a common business model. Under these circumstances, the regulatory authority of Fannie and Freddiethe Federal Housing Finance Agencydeclared that the stocks of the two companies would be de-listed on July 7, 2010. The shares of the two companies would continue to be traded on the OTC market after the de-listing.
Q3: What agency bonds are issued by Fannie and Freddie? What about their market performance?
A: The common agency bonds issued by Fannie and Freddie refer to the preferred unsecured debentures issued by the two companies. Fannie and Freddie raise funds by issuing this kind of bonds, investing in home mortgage loans and other securitization products. The two firms have always been considered to be U.S. Government agencies. Legal contracts signed with the U.S. Government to inject funds and increase their capital were not affected after Fannie and Freddie were de-listed from the NYSE. Fannie and Freddie bonds still maintain a top credit ratingAAA. Bonds issued by Fannie and Freddie still have a large market capacity and good liquidity, so they are important targets of bond investments on the international market. At the end of 2008, the Federal Reserve announced it would buy USD 200 billion of agency bonds issued by Fannie and Freddie, which further improved the safety and liquidity of the bonds and safeguarded steady market operations. The repayment of capital and interest for old bonds and the issuance of new bonds are both very normal.
Take Fannie Mae for example. Fannie Mae issued USD 70.5 billion of agency bonds in 2009, 2.2 times the amount issued in 2007. In terms of the locations of the investors, about 73 percent of the investors were from the U.S.; in terms of the types of investors, institutional investors such as mutual funds, insurance funds, and pension funds accounted for about 63 percent and central banks accounted for about 19 percent. The earnings from Fannie and Freddie agency bonds are quite stable. As revealed by the Market Index, which is mainly comprised of agency bonds issued by Fannie and Freddie, the cumulative rate of return stood at 10.7 percent in 2008 and 2009 when the crisis was at its peak and since 2010 the rate of return has remained at 3.9 percent
Q4: What are the mortgage-backed securities guaranteed by Fannie and Freddie? What about their performance in the market?
A: Mortgage Backed Securities (MBS) refer to securities collateralized by home mortgage loans issued by financial institutions. Government-sponsored enterprises such as Fannie and Freddie provide guarantees to MBS that meet all their standards and secured MBS are called agency MBS. Compared with Fannie and Freddie agency bonds, the MBS guaranteed by Fannie and Freddie are not only secured by Fannie and Freddie credit, but they are also backed by the mortgage pool for repayment, so they have a double assurance.
At the end of 2008, the Federal Reserve announced it would buy USD 1.25 trillion of MBS guaranteed by Fannie and Freddie, which further improved market liquidity. This purchase plan has now been completed. The market responded positively to the move. The repayment of capital and interest of old bonds and the issuance of new bonds are both very normal. The earnings from MBS guaranteed by Fannie and Freddie are stable. The cumulative rate of return of the U.S. Agency MBS Market Index, which is mainly comprised of MBS guaranteed by Fannie and Freddie, was 14.9 percent from 2008 to 2009, and since 2010 the rate of return has remained at 4.6 percent.
Q5: What about the performance of Fannie and Freddie bonds after the de-listing of their stocks from the NYSE?
A: The stocks of Fannie and Freddie are different from their bonds. Generally, the stock represents the ownership of the company, whereas the bond represents the debt of the company. The two are traded on different markets. The bond price of Fannie and Freddie was not affected by the de-listing of Fannie and Freddie stocks after the de-listing was announced on June 16, 2010
As for market performance, the de-listing does not have a negative influence on their bonds; in fact, the spreads between agency bonds and the MBS in different terms and U.S.Treasuries have been narrowed and the bond price has gone up. Taking the 30-year agency MBS market index, for example, the market quotation was up about 0.8 percent on July 13 from when the de-listing was first announced.
In addition, new bond financing activities were not affected after the de-listing of Fannie and Freddie stocks was announced. For example, Fannie issued USD 6 billion of 3-year maturity agency bonds on July 8, and since July Fannie and Freddie have guaranteed USD 36.6 billion of MBS. In general, the new bonds issued by Fannie and Freddie sell well. Trading is active on the secondary market and liquidity is adequate.
