WASHINGTON -- Even with plunging volumes and heated competition from banks and thrifts, Fannie Mae and Freddie Mac are continuing their steady growth.
In its third-quarter reports, Fannie Mae, the Federal National Mortgage Association, showed a 14% hike in earnings over the period a year ago and Freddie, the Federal Home Loan Mortgage Corp., posted a 25% jump.
Their strategy has been to gain earnings by feeding their loan portfolios with their own mortgage-backed securities.
Fifty percent of Fannie's portfolio growth came from securities purchases, and most of Freddie's growth did as well.
The portfolios are "engines for earnings growth," said analyst Jonathan Gray of Sanford C. Bernstein & Co.
Moving the loans from the security to the portfolio side of the business dramatically jacks up yields, Mr. Gray noted.
After taxes, Fannie earns 13 basis points on the securities, as a fee to guarantee the credit quality of the underlying loans, he said.
Once in the portfolio, Fannie earns 65 to 70 basis points on the same loans for assuming the interest-rate risk as well, he said.
Analysts said they expect both agencies will follow this strategy to ride out a volatile market next year.
Still, some are beginning to sound a note of caution on the prospects for both companies.
Thomas O'Donnell of Smith Barney has trimmed his earnings estimates for both agencies, and upped his risk evaluation on Fannie's stock.
"They're no longer coining money," said Mr. O'Donnell. "They have to grind it out like the rest of us."
Mr. O'Donnell said he expects earnings to grow by 13% at both agencies next year, instead of about 15% he had previously forecast.
Citing a decline in industry originations, the increased popularity of adjustable rate mortgages and disarray in the MBS market, Mr. O'Donnell also has upped the risk rating on Fannie's stock from low to medium.
He continues to rate Freddie Mac as a medium-risk stock.
Fannie Mae's net income in the third quarter was $542.7 million or $1.98 per share, up from $477.2 million in the period a year ago.
Lawrence M. Small, president and chief operating officer of Fannie Mae, said the main factor behind the income growth was an increase in net interest income, which was bolstered by purchases of mortgage securities.
Net interest income was $727.7 million in the third quarter, up from 720.1 million in the second quarter, and $661.7 million in the third quarter last year.
MBS guaranty fees were $272.1 million in the third quarter, compared with $271.8 million in the second quarter this year, and $242.9 million in the third quarter of 1993.
Mortgage purchases and MBS issues plunged.
The agency purchased $13.0 billion of mortgages in the third quarter, down from $24.9 billion in the third quarter of 1993.
Total MBS issued were $24.6 billion in the third quarter, compared with $62.3 billion in the third quarter of 1993.
Net interest margin (the spread between the cost of Fannie's debt and the yield on mortgages it holds) also continued to shrink. It averaged 125 basis points, compared to 140 basis points in the third quarter of 1993.
But the net mortgage portfolio grew with the securities acquisitions.
It was $214 billion at the end of the third quarter, up from $179 billion a year ago.
Freddie Mac's net income for the third quarter was $249 million, flat from the previous quarter, but up from $200 million in the third quarter last year.
Net interest income was $282 million in the third quarter, down from $270 million in the second quarter this year, but up from $211 million in the third quarter of 1993.
Freddie Mac said the third quarter increase in net interest income over the same period last year was due to a 17% increase in the interes-earning assets and a 16 basis point increase in the net interest yield.
