Client Portals

Financial Repair Continues3 min read

It's Fannie and Freddie's Turn

Sep 11, 2019 - Max Osbon ( 4 mins to read)

Max Osbon

Our two mortgage giants, Fannie Mae and Freddie Mac, have been in the news this month with positive comments. Their stocks and other securities have responded with a sharp jump, indicating hope that we will return to a healthy mortgage market and get the government largely out of the mortgage business. The securities are officially worthless but speculators are betting that they will be worth a lot when they return to the public markets. What are Fannie and Freddie indicating to individual investors?

Many ways to benefit

Fannie and Freddie and all their issues are still highly speculative. There is no indication that financial repair is imminent. These fundamental changes take time – measured more in years, not quarters. Investment patience pays off despite the fear or exuberance that follows each piece of news. The short-term up and down trading patterns of the last several years may continue.

Other financial healing

Since the beginning of the year, four top-ranked and well-endowed US universities have issued 100-year bonds. The cost is roughly 3.5%. These universities know that the cost of very long-term money for them could go down – even as low as 2% in a panic – but that the more likely path is more expensive money for these universities. It seems that this current 3.5% rate is a satisfying place for them to start the long term capital raise.It may not be a great deal for the buyer but any match between buyer and seller over 100 years demonstrates trust and healing.

The end of limbo

One day the aftermath of the financial crisis will be solved. We’ll be able to write a complete history of the mortgage market and how it eventually recovered. In my view, that time is coming sooner rather than later. I don’t think a recession will have any effect on the outcome because the demand for housing and the money to buy it with a mortgage is high and fairly constant, even when economic growth recedes.

The catalyst

A large group of regulators, politicians and private investors will have to come to an agreement that Fannie and Freddie must be freed from the government to operate in the public markets. No one is advocating they stay in the government permanently. The main sticking point is “who profits,”in other words, who gets all the financial benefit of fully public Fannie and Freddie companies. Right now, only profits lie ahead. All the losses have been reimbursed to the government and the losses by individuals are written off. That’s not fair, but it is a reality.

Investment stance

Fannie and Freddie securities are too speculative to be a core part of Osbon Capital portfolios. For one thing, there are no dividends! Juicy dividends at some point in the future seem likely, but factually if there are no dividends then there must be a compelling growth story. For diversified investors, I suggest paying attention to all the financial healing going on in this country: job growth, tax cuts, insatiable demands for yield. The return of Fannie and Freddie to the markets will signal yet another financial obstacle overcome, one that was once thought impossible.

WEEKLY INSIGHTS
delivered to your inbox

DISCLAIMER

This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.