First Pacific shies away from Freddie Mac
Written on February 25, 2008
First Pacific Advisors, which presciently dumped risky mortgage debt holdings in 2005, has now stopped buying some of the safest mortgage bonds guaranteed by government-chartered Freddie Mac.
The Los Angeles-based asset manager’s latest move follows Freddie Mac’s (FRE.N: Quote, Profile, Research) actions to ease capital requirements on its mortgage insurance partners. Freddie Mac made the change to help the insurers retain more premiums to pay claims and rebuild dwindling cash levels.
But Freddie Mac’s decision adds to a drumbeat of events that may be chipping away at the quality of its bonds, based on the financial strength of the company or at the underlying loan level, said Julian Mann, a mortgage and asset-backed bond manager at First Pacific, which invests $10 billion.
“For now, we have a trading halt,” Mann said. Freddie Mac’s decision “does illustrate the rather elastic nature of these changes taking place, and the random event risk one needs to consider. These evolutions are not thoroughly vetted.”
Decisions by Chief Executive Officer Robert Rodriguez and his team in 2005 to dump debt backed by Alt-A loans, which are riskier than prime mortgages, and shares of lenders that were easing standards helped First Pacific avoid much of the credit fallout that caused more than $100 billion in bank losses.
The FPA New Income Fund gained 6 percent in 2007 compared with 7.2 percent for the Merrill Lynch Master bond index, Mann said payday advances. The fund, which has less duration, or interest-rate risk, has outperformed in 2008 with a 1.37 percent return, he said.
Freddie Mac, Fannie Mae (FNM.N: Quote, Profile, Research) and Ginnie Mae have been widening their scope of business in the mortgage market, especially as other Wall Street-financed bond issuers have been silenced by the ongoing credit crunch, he said.
First Pacific is concerned how the changing color of loans purchased by the companies will cheapen the market for mortgage bonds known for its generic nature and liquidity.
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