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What President Obama’s Reelection Means for the Mortgage Bond Market

Written By:
November 08, 2012 at 12:03 AM

Re-Election Obama 2012

The largest real-estate investment trust (REIT)listed on the New York Stock Exchange, Annaly Capital Management Inc., like other companies that specializes in the purchase of mortgage-backed securities (MBS) are not among the many who celebrate the reelection of Barack Obama as president of the United States.

REIT refers to firms that have a collection of the real estate related investments. Besides investing in mortgage bonds, REITS may have holdings in commercial real estate, residential properties, and the equities of firms connected with real estate, which include mortgage lenders.

The biggest fear of firms like Annaly Capital Management concerns the possibility a second term for President Obama will lead to more aggressive housing schemes, which will assist home owners to refinance from high-interest rate loans into low-interest rate mortgages--especially home owners who have obligations insured by Fannie Mae or Freddie Mac.

Wellington Denahan-Norris, the CEO of the New York-based company, which reported $141.6 billion in assets at the end of the third quarter, expresses belief that the Obama victory ensures more “policy meddling” in the MBS industry.

Following are some of the concerns voiced by many in the mortgage bond industry:

New FHFA Director Possible

Now that the election has been decided, the repercussions for the $5.2 trillion market mortgage market may not only include more housing policies that will benefit home owners, but the possibility of a new director for the Federal Housing Finance Agency (FHFA). In 2008, Congress granted the FHFA oversight authority over Fannie and Freddie.

The current acting director Edward DeMarco has been heavily criticized by housing advocates for not allowing the two government-sponsored enterprises to offer more help for homeowners with underwater mortgage. Assistance such as principal reductions could have helped more borrowers qualify for refinance mortgages when the 125 loan-to-value was in place.

Borrowers would have save money by refinancing to historic low mortgage rates. Hundreds of thousands of the 4.5 million households who lost their homes to foreclosure could have avoided the disaster.

The FHFA has improved. According to the FHFA’s latest data, the number of borrowers who have little or zero equity in their homes, and refinanced under the Home Affordable Refinance Program (HARP), increased to 618,000 through August 31 2012. In 2011, only 400,024 home owners under similar circumstances were able to refinance under HARP

Less Return for MBS Investors

By implementing polices to help home owners with underwater mortgages refinance, it means mortgage bond investors will not receive as much return on their investment as anticipated.As home owners refinance their loans, the process retires the high interest rate mortgages backing the bonds. Bond investors do not want to lose this “cash cow.”

Another issue concerns talk that the Obama administration plans to allow borrowers to keep the low interest rate home loans or make the mortgages assumable for home buyers. This would mean slower pay-offs of low interest rate mortgages and less profits for MSB investors.

More Aggressive Fed

In September 2012, the Federal Reserve Board implemented another round of quantitative easing (QE3) by purchasing $40 billion in mortgage bonds each month-- on top of the $45 billion it was already spending for another initiative. The Fed promises do even more if the economy fails to respond to its current policies.

The Fed’s purchases represent competition for MSBs because the Fed’s bond purchases drives down mortgage interest rates. Some market analysts state that mortgage interest rates will be 0.1 percent lower under President Obama compared to 0.15 to 0.2 percent higher under Romney.

Related: Obama vs. Romney Real-Estate and Mortgage Refinance (Infographic)

A victory by Romney may have meant less Federal Reserve Board interference. MSB investor also had more confidence that Romney would solve the U.S. fiscal issues compared to Obama. This would mean fewer investors buying U.S. Treasuries to protect their investment capital because of the looming huge spending cuts and tax increases at the end of the year if the President and Congress fail to fix the problem.





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