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Friday, May 29, 2009

Freddie Mac To Enter The Bond Market
Reuters Story as posted at the Business Times

NEW YORK - Freddie Mac, one of the largest providers of funding for US housing, is set to break ground in bond markets next week with a new type of commercial mortgage security, a source familiar with the offering said on Friday.

The sale from the government-controlled company could signal some life in the market for mortgage securities that has been the scourge of global financial institutions for weak underwritings and falling asset values.

Freddie Mac is expected to back the bonds with its guarantee, making the securities safer than traditional commercial mortgage-backed securities that provide protection through a system of tiered risks and bond ratings. At about US$1 billion, it would exceed any multifamily bond packaged by Ginnie Mae, the government-owned issuer.

'The offering is likely to be well-received if it is indeed largely, or entirely, supported by Freddie Mac, especially as investors have mostly shunned the traditional CMBS structure,' said Chris Sullivan, chief investment officer at the United Nations Federal Credit Union in New York.

The McLean, Virginia-based company already issues and guarantees billions of dollars in residential mortgage-backed securities each month.

Taking assets from Freddie Mac's US$867 billion portfolio may be a sign the company is preparing to wind down its investments in 2010, as mandated by the government in an agreement reached in September, analysts said. Securitised assets also require less capital of Freddie Mac, a key point for a company that has repeatedly needed to tap the US Treasury for survival.

Its sibling rival Fannie Mae recently securitised US$47 billion of its residential loans, which makes the debt easier to sell if needed and is consistent with the federal mandate to wind down its investments, JPMorgan Chase & Co analysts said this week.

The US$700 billion CMBS market has been hammered by signs that credit of US office, retail and apartment buildings is quickly deteriorating and will cause losses to all but the most senior bond investors. Underwritings by investors and banks has been nil since mid-2008, leaving Freddie Mac and Fannie Mae as the few major sources of funding.

Delinquencies in Freddie Mac's US$76 billion multifamily loan investments have tripled this year to 0.9 per cent, but pale next to the 2.29 per cent of the residential mortgages that have led the company to seven straight quarterly losses.

Freddie Mac and Fannie Mae are operating under a legal status known as conservatorship, where they were placed by the government in September to ensure that mortgage losses would not cripple their ability to support housing. The Treasury has agreed to inject up to US$400 billion in capital into the companies to ensure they can keep funding houses and apartments.

Gradually winding down the portfolios next year is seen as a way to reduce risks to taxpayers.

Availability of funding for multifamily housing still leaves a hole in commercial real estate, since Freddie Mac and Fannie Mae are not permissioned for non-housing investments. However, inclusion of CMBS in the Federal Reserve's Term Asset-backed securities Loan Facility has lowered yields in the market and raised hopes that it would restart lending.

Freddie Mac's new surety bonds may be sold as early as Tuesday via a trust organised by Deutsche Bank, the source said.

A Freddie Mac spokesman declined to comment on the issue. The New York Post earlier reported the sale, citing sources. -- REUTERS