With Freddie Mac forced to oust its CEO Greg Parseghian, analysts say that this would have near-term negative implications for MBS.
After the close of trading Friday, the Office of Federal Housing Enterprise Oversight said that Freddie Mac would replace Parseghian as well as the GSE’s general counsel Maud Mater. However, Parseghian will be allowed to remain as CEO and President until a suitable replacement is found.
JPMorgan Securities said that in their view the implications are clearly negative, especially in the near term. Freddie Mac is unlikely to meaningfully grow its retained portfolio during the search for a new CEO, said JPMorgan. Further, analysts note the implications for Fannie might also be negative if all agency spreads widen in sympathy.
JPMorgan also said last Friday that wider agency spreads might take their toll on the GSE “arbitrage.” Analysts said that last week agency debentures widened by 2 to 3 basis points. They explained that most of the damage was done in short-term debt, which currently has a larger impact on the mortgage/agency “arbitrage.” The firm said that two-year agencies and discounts are now trading at only 6bps through swaps. In the last two years, the short debt has widened by almost 24 basis points relative to swaps. JPMorgan said that the funding issues would also probably cause slower near term purchase activity for the GSEs. Further, they don’t expect banks to pick up the slack in fixed-rate paper, at least not in the third quarter.
Meanwhile, in a report released today, RBS Greenwich Capital said that they are now slightly negative on agency spreads. Analysts said that negatives include the uncertainty currently surrounding Freddie as it begins its transitional phase while it looks for a new CEO to replace Parseghian. There are also Freddie’s attempts to provide the markets with adjusted statements. Further, uncertainty surrounds Fannie Mae as there are still questions about the effectiveness of the GSE’s duration gap management as well as its impact on the GSE’s capitalization levels. Greenwich added that supply is also a factor as both Fannie and Freddie have made record commitments to purchase mortgages in the last three months but these have to be funded in a market where there is lack-luster demand.
In related news this morning, Fitch Ratings affirmed Freddie’s senior debt rated AAA. However, Fitch lowered the ratings on Freddie’s subordinated debt and preferred stock to AA- from AA. Standard & Poor's also said today that its ratings on Freddie are not affected by the latest changes in senior management. Moody's Investors Service also announced that Freddie's A- financial strength rating remains under review for possible downgrade.
