They call it “burying” in Washington, D.C.
It’s when you release politically unsavory news on Friday evening. Most folks just aren’t paying attention on Fridays and by the time next week’s news cycle comes around, the mainstream media has already moved onto something new.
The ultimate “burying” days are just before holidays. This past Christmas Eve was no different.
While millions of Americans were traveling, getting together with their families, or crossing off the final names on their shopping list, the U.S. Treasury “buried” its latest addition to the unpopular bailouts for Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).
On Christmas Eve the Treasury announced it would cover an unlimited amount of mortgage losses at Fannie and Freddie through 2012.
The real bad news, which nobody really talked about, is they’re going to need it and there are a small group of investors turning the bailout bonanza into their own gain (and you can to, more below).
This Trend is not Your Friend
The Treasury’s cap was originally set at $400 billion. Considering the Treasury has pumped $111 billion into Fannie and Freddie so far, there was still $289 left in the till.
That would seem like enough at this point, given the “recovery” and all. But it probably won’t be.
Take a look at the 10-year chart of Fannie Mae delinquency rates from Calculated Risk:
The chart, which would make even the most creative global warming climate change alarmist envious, shows there are a lot more losses ahead for Fannie and Freddie.
Almost 5% of Fannie Mae’s single family mortgages were officially delinquent at last report. The problem is the trend is still up. And it’s likely to keep going up because once all the government assistance – tax rebates, artificially depressed interest rates, and guarantees on 9 out of 10 mortgages – housing prices should be back on their natural course. And after such a tremendous bubble, the natural course would be much lower.
However, all is not lost. Government intervention always has unintended consequences. This time is no different.
The Winners and the Losers
One of the biggest reasons for removing the cap on the Fannie and Freddie loan losses was to appease the largest buyers of Fannie and Freddie bonds – China and Japan.
The government wants them to keep buying the bonds to help keep interest rates down and housing prices up. And removing the cap was a signal all would be ok for bondholders, regardless of the eventual cost to the taxpayer.
The thing is though Fannie and Freddie bonds, although backed by the U.S. Treasury, are still paying more than Treasuries. As I write, the yield on a 10-year agency bonds is 4.31%. That’s 0.61% more than the yield on the 10-year Treasury bond of 3.8%.
That may not sound like much, but a few entrepreneurial companies have found ways to exploit the difference between the yields. And they’re paying shareholders as much as 16% per year.
In a low interest rate, low economic growth environment, there aren’t many opportunities. But a 16% yield all backed by the U.S. government is a definite opportunity.
That’s why with the Treasury now fully behind Fannie and Freddie, whatever the costs, we see a genuine opportunity in the high yield stocks which are taking government meddling in stride and turning it all into hefty dividends for their shareholders.
The government may try to “bury” all sorts of news, but they’ll never get it past everyone.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
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