Freddie’s friends in the Gulf

While American protectionists think of ways to strengthen their anti-free trade legislation and some Gulf investors worry about the possibility of forced disposal of their expensive assets in the West, others are quietly getting on with the business. And a lucrative business it is proving to be all round.
Freddie Mac, the mortgage business indirectly backed by the United States’ government, was in Dubai this week as part of a global roadshow to promote its investment products, and had a surprisingly upbeat message to tell.
In the fallout from the sub-prime crisis, you might expect any financial institution in the American property market to have its tail between its legs, but not Freddie. Its products have attracted “tens of billions of dollars” worth of investment from the Middle East in recent months, and the firm is forecasting lots more to come from a region where it has found discerning investment judgement to be the norm.
Freddie – the acronym derives from its official name the Federal Home Loan Mortgage Corporation – was set up by an act of the US Congress in the 1970s to provide funding and liquidity in the residential property market.
Though it has an “implicit” guarantee from the US government, it is also a fully quoted public company whose shares are traded on the New York Stock Exchange. It derives its business from the sale of mortgage-backed securities in the form of fixed interest, and guaranteed fee income from mortgage related insurance policies.
You might think those are exactly the sectors to avoid in the current climate, but you would be wrong. Freddie Mac was set up to alleviate the effects of the kind of credit squeeze we have seen over the past year, and its guiding philosophy has always been characterised by a cautious, prudent attitude to asset valuation and borrower evaluation. No “ninja” (no income, no job) loans to mid-West trailer trash for Freddie.
With its triple-A rated investments and high calibre borrowers, it has set the standard for the mortgage industry in the US, and as the effects of the sub-prime crisis and credit crunch work their way through the American property market, it actually stands to expand its business by picking up good assets at knockdown prices.
There is still plenty of opportunity in that area. US property experts believe there will be a 15 per cent peak-to-trough fall in values as a result of the current problems, though this could be as high as 25 per cent in “hotspots” such as California and Florida.
Freddie’s own calculations are that we could still be 12 months away from that trough suggesting there will be further bargains to be had, especially in the “jumbo” mortgage sector where high-value properties may be difficult to sell quickly in the current market.
The Gulf has traditionally been a big investor in Freddie’s mortgage backed securities, but the two-way business understandably took a dive in the second half of last year. Now it is picking up again, with multi-billion investments from the Gulf and the rest of the region. The attractions for Gulf investors are obvious.
First, there is the much-maligned dollar peg, which minimises the risks of currency exposure felt in other parts of the investing world. With sentiment apparently hardening that the peg is here to stay for the GCC at least until 2010, that will be an ongoing reassurance factor for Gulf investors.
Second, Freddie’s fixed-interest products carry none of the risk of equity investments. Sovereign wealth funds from the region may be worrying what the Committee on Foreign Investment in the US may be thinking about the huge equity stakes taken in US corporations by Middle East investors, but there are no such fears for fixed-interest trades.
These advantages have attracted an even spread of investment from across the Middle East and North Africa region, but it is no surprise that the bulk of the flow comes from the UAE and Saudi Arabia.
There are about seven million Muslims in the US, and Freddie already participates in the Shariah-compliant market via partner firms. It has considered whether to launch its own Islamic mortgage business, but has put off a final decision until the market reaches critical mass.
Although Democrats have traditionally looked more favourably on Freddie than Republicans, whoever gets in the White House will have to deal with the fallout from the sub-prime crisis. Freddie Mac looks well-positioned to benefit from the resolution – and to advance the cause of free trade between the US and the Middle East.