For more than a decade, Fannie Mae and Freddie Mac, the housing giants that make the U.S. mortgage market run, have attracted overseas investors with a simple pitch: The securities they issue are just as good as the U.S. government’s, and they usually pay better.
The marketing plan worked.
About one-fifth of securities issued by the Federal National Mortgage Association — Fannie Mae — and the Federal Home Loan Mortgage Corp. — Freddie Mac — and a handful of much smaller quasi-governmental agencies, about $1.5 trillion worth, were held by foreign investors at the end of March. One of every 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.
Now that the two companies are at risk, how their rescue is handled will ultimately test the world’s faith in American markets. It could also influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say.
“No less than the international perception of the credit quality of the U.S. government is at stake,” said Richard Hofmann, an analyst with CreditSights, an independent research house with offices in London and New York.
Also at stake is Americans’ future ability to gain access to credit. If foreign companies and governments abandon U.S. investments, home, auto and credit card loans will be much harder to come by.
That helps explain why Treasury Secretary Henry Paulson is pressing U.S. lawmakers for the authority to inject unspecified billions of dollars in cash into either Fannie Mae or Freddie Mac, or both. The “blank check” nature of his request has raised concerns on Capitol Hill, but Paulson is betting that Congress is even more fearful of the consequences of doing nothing to rescue Fannie Mae and Freddie Mac.
Asian institutions and investors hold about $800 billion in securities issued by Fannie Mae and Freddie Mac, mostly in China and Japan.
In Europe, roughly $39 billion in Fannie and Freddie debt is held in Luxembourg and $33billion more in Belgium, countries that are home to large investment management firms. Investors in Britain hold $28 billion, and Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.
The trillions of dollars in securities issued by Fannie Mae and Freddie Mac and backed by American mortgages were never explicitly guaranteed by the U.S. government, but foreign and domestic investors alike have always believed, because of the companies’ integral role in the housing market and their marketing pitch, that the guarantee would be backed up if it were tested.
As the U.S. government’s debt, and the corresponding amount of Treasury securities, shrank in the late 1990s, foreign investors with currency reserves needed a safe alternative to park their cash. Fannie Mae and Freddie Mac stepped up their overseas marketing efforts and, with the help of Wall Street banks, sold billions of dollars in securities overseas.
Asian banks and insurers bought Fannie’s and Freddie’s paper because it gave a little more yield than a straight Treasury note — “the same risk at a better price,” said Deborah Schuler, an analyst with Moody’s Investors Service in Singapore.
Investment managers at Asian banks and governments are “very comfortable with the idea of implied government support” because it is so prevalent in Asia, she said.
Still, this week’s congressional debate on the issue “is going to worry people,” Schuler said, though she, like most analysts, is confident that Washington will deliver, just as it has in past financial crises such as the savings-and-loan industry bailout of the late 1980s and early 1990s.
Because America’s relations with a host of countries are intricately tied to Fannie Mae and Freddie Mac, the only realistic option open to lawmakers may be to hand the Treasury Department that blank check, analysts say.
The two housing agencies have always been fierce competitors, and they made no exception in their expansion into international markets. Top executives wooed governments, banks and insurance companies in Asia and Europe, and lent executives to help foreign governments, including Russia and Hong Kong, set up their own American-style mortgage markets.
Questions about Fannie Mae and Freddie Mac have prompted individual institutions and governments in Asia and Europe to specify their exposure in recent days, but so far international concern has been limited.
Ingo Buse, a spokesman for Zurich Financial Services, Switzerland’s largest insurer, said it held $8.3 billion in mortgage securities backed by Freddie Mac or Fannie Mae, and felt “comfortable with our position and asset allocation.”
Swiss Reinsurance, Switzerland’s largest reinsurer, said Wednesday that it held $9.6billion of corporate debt from Freddie Mac and Fannie Mae and $12 billion in mortgage securities backed by the two companies.
Its holding of Freddie Mac and Fannie Mae shares is minimal, it said.
Hannover Re, Germany’s second-largest reinsurer after Munich Re, said it held $199million in Freddie Mac and Fannie Mae securities. “We are not worried about the exposure,” said Stefan Schulz, a spokesman for the company, “because we expect the U.S. government to step in if there is any problem.”
