As U.S. loan origination volume slows, the two mortgage agencies, Fannie Mae and Freddie Mac, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.] have been repurchasing an increasing amount of their own outstanding mortgage-backed securities to expand their retained loan portfolios.
These repurchases have a significant net positive impact on earnings because the income earned on owned mortgages is much higher than that earned on insured mortgages. These transactions effectively move the securities onto the agencies' balance sheets and increase the revenues earned on the underlying loans from roughly 20 basis points (representative of the guarantee fees) to roughly 90 basis points (representative of the net interest spread).
Once the securities are repurchased, both companies account for the full revenue stream as interest earned.
As the amount of repurchased securities expands, investors should be sure to use net mortgage-backed securities, not total MBS, for modeling purposes.
This increased repurchase activity should in no way alter our positive earnings projections. In fact, the two mortgage agencies' ability to execute these transactions is yet another advantage that they have to sustain balance sheet growth whenever the economy slows.
Investors should be clear on the extensive disclosure that the two companies are providing. Investors also should focus on two MBS outstanding numbers, one for MBS outstanding, and one for "net" MBS, meaning MBS that are generating guarantee fees.
Fannie Mac puts the mount of MBS held in portfolio of $34.9 billion. Thus, as of July 31, Fannie Mae reported total MBS of $518 billion, footnoting that $34.9 billion of the MBS were owned in the retained portfolio.
Freddie Mac showed MBS at July 31 of $466 billion, after deducting $18.9 billion of MBS that had been repurchased into the retained portfolio. The net MBS should be used to calculate guarantee fees. Thus, we added back the $18.9 billion of MBS held in the retained portfolio to get total MBS of $485 billion.
Year to date, Fannie Mac has issued $96 billion of MBS and experienced liquidations of $73 billion for nominal annualized growth of 8.0%. Subtracting net growth of MBS in portfolio results in growth of $12 billion through July, for an annualized growth rate of 4.4%. While this appears lower than in previous periods, the positive side is that the retained portfolio received additional growth as a result.
Freddie Mac's year-to-date MBS issuance totals $91 billion, with liquidations of $56 billion for nominal growth of 13.7%.
As shown in Freddie Mac's monthly, a further deduction was made for MBS repurchased for the retained portfolio of $8 billion, leaving net growth of $27 billion year to date, or 10.5% annualized.
Through the first seven months of 1994, Freddie Mac generated a net expansion in mortgage obligations of $34.7 billion, consisting of $27 billion of mortgage-backed securities and $7.7 billion of retained loans.
During the same time period, Fannie Mae generated net growth of $32 billion, comprising $12 billion of MBS and $20 billion of retained loans.
Total MBS issuance was higher at Fannie Mae, totaling $96 billion, compared with $91 billion at Freddie Mac. Total retained portfolio mortgage purchases also were higher at Fannie Mae, amounting to $42.1 billion, compared with $13.5 billion at Freddie Mac.
Offsetting Fannie Mae's stronger gross volume were seemingly higher liquidation/prepayment rates.
We determined that Fannie Mae's MBS liquidation rate during the first seven months annualized was 25.3%, compared with Freddie Mac's 21.9% rate.
Using the same calculation for the retained portfolio, Fannie Mae experienced a 24.3% rate compared with a 17.4% rate for Freddie Mac.
