IS FREDDIE MAC BACK IN THE SUBPRIME LOAN BUSINESS?
By
Todd Horwitz Chief Market Strategist Adam Mesh Trading
Seems it was only yesterday that the taxpayers were bailing out Freddie Mac from the subprime mortgage morass. Well it wasn’t yesterday but it was only six years ago that the affordable housing bubble exploded and the mortgage pools that were rated AAA turned into MUD.
Now Freddie is back in the commercial real estate market and is creating pools of cash that are financing trailer park developers. Nothing wrong with manufactured housing as long as you don’t have a tornado visit you. The money is being lent to developers and is backed by the rents paid by the citizens that live in the parks.
Fannie Mae has been in the manufactured housing market since 2000, but has not been as deeply involved as Freddie Mac has been. Jason Boehlert a senior vice president for the Manufactured Housing Institute, a mouth piece for the industry, praised Freddie Mac as taking a major step in the right direction, which is no surprise since his organization is the recipient of much of the money.
Not only is Freddie Mac involved, but many major investment banks are also getting back into the affordable housing market. Last year firms such as Deutsche bank and Barclays PLC have put as much as 4% of their total loan portfolios into commercial real estate backed by trailer parks.
Yields on the 10 year mortgage pools backed by the company are averaging a little over 3.20% which is only about 44 basis points above the 10 year Treasuries. It seems like a great deal for the borrowers who can get a tremendous spread on the money that Freddie is lending them, the only question is what happens if the economy has another meltdown?
The answer is that these bonds are probably pretty safe. The developers own the real estate and in times of trouble it is generally more upscale developments that get in trouble. During the Great recession trailer parks did very well as they truly were affordable housing. Hopefully there will be no next time for a real estate meltdown, but history shows that if we repeat our past mistake that the past will come back to life. Freddie Mac feels that they are not repeating past mistakes by getting involved in the current commercial real estate market and the American taxpayer hopes that they are right!
As Always,
Keep those stops tight.
Todd “Bubba” Horwitz