By the Numbers
Fannie Mae, Freddie Mac portfolios keep rising
This material is a Marketing Communication and does not constitute Independent Investment Research.
The Fannie Mae and Freddie Mac investment portfolios grew by a combined $8.35 billion in September, extending a run of noticeable growth that started in June. Investors have focused for months on the possibility of portfolio growth designed to lift earnings, tighten MBS spreads or do both. Debt markets have watched for more agency issuance, and derivative markets for more demand for swaps and swaptions.
The Fannie Mae portfolio grew by $5.47 billion in September off rising holdings of their own MBS and the MBS of either Freddie Mac or Ginnie Mae. Holdings of Fannie Mae MBS rose $3.0 billion and other agency MBS by $2.2 billion (Exhibit 1)
Exhibit 1: The Fannie Mae portfolio rose $5.45 billion in September
Source: Fannie Mae, Santander US Capital Markets
The Freddie Mac portfolio rose $2.88 billion in September largely on a $2.60 billion lift in mortgage loans (Exhibit 2). Mortgage loans, likely bought through their cash window directly from originators, have led Freddie Mac portfolio growth since June.
Exhibit 2: The Freddie Mac portfolio rose $2.88 billion in September
Source: Fannie Mae, Santander US Capital Markets
Holders of agency MBS, debt and rate derivatives have watched the Fannie Mae and Freddie Mac portfolios since the current administration in May announced its interest in some kind of public offering of equity in the enterprises. The enterprises each already have authority to invest up to $225 billion under their agreements with the US Treasury. The portfolios historically have added significant profits, and some recent hires and reorganizations have improved the ability of the enterprises to invest (more here). Profits from larger portfolios could make an equity offering easier.
Even a small amount of buying by the enterprises could have a meaningful impact on MBS spreads. Total outstanding Fannie Mae and Freddie Mac MBS is actually down $0.5 billion for the year through September, so even modest purchases or retention of loans that might otherwise go into MBS could tighten spreads.
Since the enterprises would likely need to fund purchases by issuing debt and would likely hedge interest rate and prepayment risk through swaps and swaptions, those markets also could see an impact from revived portfolio investment. Total debt outstanding at Freddie Mac has tracked growth in the portfolio, although that is not the case for Fannie Mae (Exhibit 3A, 3B). The enterprises seem most likely to pay fixed on swaps, pushing swap spreads wider, and buy options, pushing up implied volatility.
Exhibit 3A: Debt outstanding has tracked portfolio growth at Freddie Mac
Exhibit 3B: But not at Fannie Mae
Source: Freddie Mac, Fannie Mae, Santander US Capital Markets
Neither enterprise has formally announced plans to grow the portfolio, and any growth would likely come gradually. Neither Fannie Mae nor Freddie Mac have consistently bought, funded and hedged agency MBS since the Global Financial Crisis. It may take time to rebuild the skills and systems needed to manage steady growth, but the growth in the portfolios since June suggest the process has started.
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