Miami discontinues adding investments to mortgage giants, plans to continue to keep a quarter of investment portfolio with them
By Yudislaidy Fernandez
Recent losses of mortgage giants Fannie Mae and Freddie Mac have led the City of Miami to stop adding investments in the two mortgage-market dominators, though it plans to continue to keep a quarter of its investment portfolio in them.
The quasi-public, shareholder-owned companies are taking a big hit from the subprime market. For the city, the hits mean fewer dollars from investments will come to the general fund.
Currently, the city holds $48.3 million in Fannie bonds and $64 million in Freddie, which represents 25% of the city's total investment portfolio, according to a memo to commissioners from City Manager Pete Hernandez.
The city's biggest investment tools are Fannie and US Treasuries, Miami Chief Financial Officer Larry Spring said.
Its total investment in government treasuries, securities and money markets totals $300.1 million. It also has $265.1 million in US government-chartered agencies: Fannie, Freddie, Federal Farm Credit Bank and Federal Home Loan Banks.
In the meantime, city officials say they are monitoring the two companies' recent losses and other investment institutions in the city's portfolio.
The city has stopped buying more debt securities from the two companies.
"We are not purchasing any additional bonds backed by mortgages with either Freddie or Fannie," Mr. Spring said.
It's a decision Commissioner Tomás Regalado said was long over due.
"I think it was a big mistake for the city to invest a huge portfolio in these two lenders. Whoever did that wasn't following the news that the market crisis has been growing for years and now the city is in harm's way," he said.
But Mr. Spring said there's no reason for alarm.
The city's finance committee is meeting monthly to review the portfolio and finance-related issues and the treasurer and financial director are monitoring the city's investments daily, he said. He insisted that the city's investments are not risky to the point it has to start selling them off.
Mr. Regalado plans to bring the issue up at the next commission meeting in September and is to request a full report on the city's investments.
When Fannie and Freddie were created, the government-sponsored companies were to keep money flowing to mortgage lenders to help middle-class Americans buy homes.
But buying sub-prime mortgages issued to homebuyers with high-risk credit has backfired.
A recent BusinessWeek article stated that worries of a government takeover or restructuring of Fannie and Freddie drove the two companies' stock prices down nearly 90% over the past year.
With many financial experts questioning whether the Fannie and Freddie had the resources to endure a severe market downturn, Congress extended them a life preserver with the Federal Housing and Economic Recovery Act. The new law, signed by President Bush late last month, extends the federally chartered entities an unlimited line of credit.
Marcos A. Kerbel, adjunct professor of finance at Florida International University, said the next order of business is to "stabilize the market… to stop the hemorrhaging in home prices."
Mr. Spring said the impact of Fannie and Freddie's losses on city investments has mostly been on short-term investments, such as 30- to 90-day treasuries, for which interest varies.
The city is restricted on where it can invest taxpayers' money — AAA-rated securities are favored as they are considered safe.
The returns Miami gets from investments are used to "enhance the city's overall revenues" as the city makes about $8 million a year in interest income, Mr. Spring said.
That sum is to decrease this year with the pricing on its investments going down, he said.
At the beginning of the year, the city adjusted its forecast on returns as market rates began to drop — preparing for the fall, he added.
The city prefers to continue monitoring its current investments and for now cease to buy any more mortgage-backed bonds in Fannie or Freddie rather than to "liquidate and sell," Mr. Spring said.
But Commissioner Regalado called the move "playing in the casino with taxpayers' money."
"It could be devastating because that is money we will not be able to recuperate," he said. "It's a bad judgment in investment."
But Mr. Spring said pulling out now could mean more losses for the city.
"Depending where the market is that day, it (the city) could have to sell at a discount rate that would make us lose investment money."
Mr. Regalado said he voiced his concerns to the administration on the importance of diversifying Miami's portfolio.
FIU's Mr. Kerbel agrees that any safe investor should have a diverse portfolio to prepare for unexpected downturns in market activity.
"Portfolio diversification is extremely important because some (investments) would go down and others would go up, balancing your negative effect."