April numbers are in from Fannie and Freddie. With a major mortgage refinancing boom circulating through the system, for the month Fannie purchased a record $53.5 billion of mortgages (surpassing the previous record of $51.6 billion set in December 1998). Its total book of business (portfolio purchases and Fannie Mae mortgage-backs held in the marketplace) expanded at a rate of almost 22% ($22.7 billion), compared to about 9% last year. Freddie Mac made total purchases of $41 billion during April, while expanding its mortgage portfolio at a rate of almost 27% ($9.3 billion). The continued credit excess instigated by the GSEs is as incredible as it is reckless. Importantly, the GSEs are providing massive liquidity to the old holders of refinanced mortgages ("reliquefication"), which they then use to absorb surging issuance of corporate debt, credit-card, auto and other asset backs, commercial mortgage-backs, CDOs (collateralized debt obligations), CLOs (collateralized loan obligations), junk and myriad other debt instruments.

Extracted from an article by Dow Jones’ Joe Niedzielski:"Wider credit spreads on bonds and loans led to a doubling of the cash-flow-structured fixed-income vehicles that Standard & Poor’s rated in the first quarter. (S&P managing director David) Tesher said traditional asset-backed investors are turning to the CDO market to increase assets under management and to escape from the volatility of having to mark to market their holdings of asset-backed securities. Issuance of these vehicles also gives these investors increased capacity to buy more asset-backed securities, he said. ‘Often there are illiquid marks and they can do a CDO of asset-backeds and no longer have to mark to market the underlying collateral,’ Tesher said. ‘That's a big motivation.’" Well, isn’t that special…

Wall Street and the leveraged speculating community are certainly hard at work, developing strategies, creating structures, and"doing deals," all the while benefiting handsomely from the extreme monetary accommodation. Acting together, the Fed and the powerful GSE"reliquefication" mechanism have created what is developing into an historic mortgage credit boom. From a Wall Street research report:"Total (Fannie Mae) new business volume of $53.5 billion implies $92 billion combined for Fannie and Freddie in the month, at least $250-$300 billion in the quarter, and perhaps $465 billion in US originations in the second quarter, representing a staggering $1.85 trillion annual rate of US originations." $465 billion of mortgage originations this quarter? $1.85 trillion for the year? Truly, utterly amazing.

So far, May is living up to expectations. In its weekly data, the Mortgage Bankers Association reported dollar volume of applications 86% above year ago levels. Purchase applications are running up 11% (dollar volume), with applications to refinance up 468%. It is certainly not just the GSEs that are aggressively playing the real estate bubble. This week GMAC announced a registration to sell $14 billion of mortgage-back securities and all the major Wall Street firms are participating. Bear Stearns reported the sale of almost $6 billion of mortgage-backs for FleetBoston."Completion of this complex transaction depended heavily on the innovative work of Bear Stearns’ Financial Analytics and Structured Transactions Group. Through its proprietary analytics, its proprietary collateralized mortgage obligation arbitrage and proprietary loan-level prepayment models, Bear Stearns and its financial engineering capabilities optimized asset allocation, maximized Fleet’s asset value and created a multitude of structured securities. The resulting deal was the largest Agency re-securitization ever issued." It does sound impressive…


<ul> ~ Prudentbear.com</ul>
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