A Benchmark Bill is a unit of debt security that Fannie Mae, the government-sponsored mortgage lender, uses to finance its lending operations. Every week, Mae sells bonds called Benchmark Bills over the Internet in a Dutch auction to finance its massive lending operations. A Dutch auction is an auction in which the auctioneer begins with a high price and gradually lowers it until a buyer comes forward. In Mae’s auction, the interest rate is the subject of the bid. When an interest rate is accepted as the lowest bid, it is renamed the “stop-out rate.”
Fannie Mae issues Benchmark Bills that come due in three month, six month, and sometimes, one-year periods. The interest rates on the bonds vary according to when the bills are sold. The minimum amount of these bonds is $1,000. The bond increases in increments of $1,000. Only certain institutions, securities dealers and dealer banks such as Goldman Sachs and Wells Fargo, are eligible to purchase Benchmark Bills.
Fannie Mae issues other types of bonds with longer maturation periods, such as Discount Notes and Benchmark Notes. The sale of Benchmark Bills provides a valuable, more-frequent indication of activity in the mortgage market. The word “benchmark” describes a bond that is a standard measure of performance for other bonds.
Fannie Mae is the largest source of mortgage funding for U.S. homeowners. The lender is climbing out of the mortgage crisis of the late 2000s. Since 2008, Fannie Mae has been under conservatorship of the Federal Housing Finance Agency (FHFA). Fannie Mae has posted profits for two consecutive quarters but owes taxpayers approximately $142 billion for its 2008 bailout.
Fannie Mae is doing well for several reasons. The rate of foreclosures has slowed and home prices are climbing. When home prices are high, Fannie Mae is able to expect a greater return. The stable housing market has also prompted Fannie Mae to make more money available for loans. In 2012, Fannie Mae moved $3 billon out of loss reserves. In contrast, in 2011, Fannie Mae added $6.5 billion to loss reserves. Also in 2012, Fannie Mae discovered an accounting error showing a previously unreported $1.1 billion gain.
Fannie Mae’s stability depends on its posting a profit each quarter. This allows it to operate in the black and make payments for its bailout debt to the U.S. Treasury. If the number of foreclosures rises or Mae is not able to sell bonds such as Benchmark Bills, Mae risks having to borrow from the Treasury to pay off its debt.
Since 2009, Fannie Mae has acted more conservatively. It now requires more borrowers to have higher credit scores and make larger down payments. As Fannie Mae closes out risky loans, its overall portfolio should stabilize. The hope is that in coming years, the mortgage giant will be able to make a greater number of residential loans at higher interest rates. This should allow Fannie Mae to sell more debt in the form of Benchmark Bills. Even better, the bills should have greater stop-out rates than in the past.
This article was first published on http://moneyprime.com.