Mortgage REITs Catch Bid on Fed’s New $4 Billion a Day Habit

by REIT Wrecks on January 12, 2009

The Fed announced late in 2008 that they would finally follow through on the original TARP intentions and actually buy mortgages. The Fed’s plan is to spend $500 billion by June 30th. That would would be $4 billion a day in government demand for mortgage bonds from the Fed’s munificent money men, so they have some catching up to do.

The program is officially intended to lower home-loan rates, but it also has mortgage traders lining up in anticipation of the giant bid. Mortgage REITs, while still weak, have been looking a little less anemic in response.

Back in early October, numerous analysts and investors jumped into mortgage bonds and REITs after congress finally passed the $700 billion financial rescue package. But anything mortgage-related was subsequently thrown out the window I don’t think we’re in Kansas anymore after the Fed’s focus shifted from buying troubled assets to pumping tax dollars into banks instead.

Some commercial-mortgage bonds fell so low on the news that all the loans could default and a buyer wouldn’t lose money. Then in December, the Fed said that its new $200 billion lending program for buyers of asset-backed bonds may be expanded to include mortgages. Later that month, they confirmed their intention to purchase large quantities of mortgages in the new year. Maybe they should just be buying cheap penny stocks instead.

According to Bloomberg, the Fed’s buying binge began last week with the purchase of $10.2 billion of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities. Not surprisingly, this support from Uncle Sam is also boosting demand for Mortgage REITs, even after an absolutely bloody November.

In addition to enriching mortgage traders along the way, the program is also having the intended effect on the market for residential home loans. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage dropped for a 10th week last week to 5.01 percent, the lowest on record. PIMCO believes that rate may fall to 4.5%

The government also has been expanding the $1.6 trillion mortgage portfolios of Fannie Mae and Freddie Mac, which isn’t difficult to do now that they are in receivership and under effective control of the Fed.

Given that the Fed demand is targeting the single family mortgage market, residential Mortgage REITs like Annaly (NLY) are trouncing the broader MREIT index.

The Fed’s $4 billion a day habit is really only the tip of the iceberg intended to sink the titanic housing mess. Under a separate program, the Treasury Department bought $49.7 billion of Fannie Mae and Freddie Mac mortgage securities in September, October and November, and in December the Fed bought $15 billion of the corporate debt from Fannie Mae, Freddie Mac and the Federal Home Loan Bank system. That program may target as much as $100 billion in corporate debt for the two agencies, which is intended to lower their borrowing costs. yikes! what about full faith and credit?

Mortgage REITs
Disclosure: None at the time of publication
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