NEW YORK--(BUSINESS WIRE)--Annaly Capital Management, Inc. (NYSE: NLY) released a white paper, “Letter From a Washington Conference Room,” in which Michael A.J. Farrell, Annaly’s Chairman, CEO and President, relates his observations from the August 17, 2010, housing finance conference hosted by Treasury Secretary Geithner and HUD Secretary Donovan. Please visit our website, www.annaly.com, to view the complete white paper with charts. Through its monthly commentary, white papers and blog, Annaly Salvos, Annaly expresses its thoughts and opinions on issues and events in the financial markets.
Mr. Farrell writes that the $11 trillion U.S. home mortgage market cannot be supported solely by the banking system, which has less than $8 trillion in deposits, only a fraction of which are deployed in funding mortgages. The shortfall between the demand for housing credit and the supply of capital is mostly filled by investors in the secondary market of mortgage-backed securities (MBS). The majority of this capital is invested in government-guaranteed MBS issued by the government Agencies, Fannie Mae, Freddie Mac and Ginnie Mae. It is unlikely that the smaller number of buyers of credit-sensitive non-Agency MBS will be sufficient to supplant the installed base of rates buyers in filling the gap between the supply and demand for mortgage credit, at least not at current prices. “Without the support of mortgage values and home prices that is provided by the government guarantee,” he says, “that hole will get smaller not by increasing demand from the traditional non-Agency buyer but by shrinking the value of the collateral and the mortgages needed to finance them.”
Mr. Farrell goes on to suggest that Secretary Geithner lay out Treasury’s plan for housing finance reform as soon as possible in order to quell the uncertainty that is already in the market. As Annaly stated in its submission to Treasury’s request for public input on housing finance reform, he recommends that Fannie and Freddie should continue to operate in conservatorship with a goal of winding down their retained portfolios over a set period of time. “At that point in time,” he says, “they would be nationalized and perhaps merged into one entity. This would enable them to continue to have their MBS guaranteed with a government wrap, enforce underwriting standards, and enable the flow of credit from the secondary mortgage market to the primary mortgage market for conforming borrowers….”
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