1 Huge Factor Impacting the Future of Annaly Capital Management, Inc.

CEO Wellington Denahan sees a big role for mortgage REITs – if Fannie and Freddie ever get out of the way

May 29, 2014 at 6:00AM

Wellington Denahan, CEO of Annaly Capital Management, (NYSE:NLY), recently spoke with REIT.com about the future role of mortgage REITs – particularly in regards to the winding down of Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC). She believes mREITs are poised to take over much of what Fannie and Freddie do now, providing private capital for the housing market once the two government-sponsored entities are resolved.

This sounds wonderful, but there's a hitch: Fannie and Freddie are nowhere near the end of their run, and it looks like the two are picking up steam, rather than powering down.

New management expands the reach of GSEs
New Federal Housing Finance Agency Chief Mel Watt has taken the reins at the two agencies, and is running them both at full gallop. Not only is Watt looking to play a larger role in the area of housing finance, but he has also is softening the stance toward mortgage buybacks – which means banks will not be required to repurchase as many faulty loans as they otherwise would have.

Add in the fact Congressional inertia toward reforming the GSEs hasn't lessened at all, and the end of Fannie and Freddie is beginning to look a lot farther off than it did even one year ago.

Others weigh in
Annaly's CEO isn't the only one predicting a boost for the sector as mortgage financing reform gets under way. In March, Barclays Equity Research opined that not only non-agency mortgage REITs would benefit from reform, but agency players, as well.

UBS Global Research supported this view in April, specifically mentioning Redwood Trust, a huge player in jumbo loan securitization, as a specific beneficiary. For its part, Redwood expects to capitalize on the need for private capital while the system is undergoing reform – and afterward. 

Denahan obviously believes agency-only mREITs can play an important part in a post-Fannie and Freddie world, and likens the rise of equity REITs after the savings and loan crisis to the potential that exists for companies like hers.

Is she right? Very possibly, but the lack of movement on the issue of GSE reform will likely keep her predictions in the realm of theory, rather than reality – at least for the foreseeable future.

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Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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