It was a bad week for the stock performance of secondary market giants Fannie Mac and Freddie Mac -- in fact it has been a bad couple of months.
Last week Fannie Mae, formally the Federal National Mortgage Assocation, saw its stock price slump by a little over 6% -- closing the week down 4 7/8 at 72 1/2.
Likewise, Freddie Mac, the Federal Home Loan Mortgage Corp., fell by almost 7% in the week, ending Friday at 51 7/8, down 3 3/4.
"Its a continuation of the same rotation out of the stocks we've had for some months," said Bruce Harting, an analyst with Salomon Brothers.
Since highs were set last summer, Fannie Mae has fallen by about 16% and Freddie Mac is down 12%.
According to Mr. Harting, who has a "buy" rating on both securities, the selling has been prompted by a fear that this year's poor mortgage loan-origination market will extend through 1995.
"The market is pricing the stocks as if the current environment will not change," he said.
The "current environment" is one in which loan volume is way down -- 43-40% by most estimates -- and fewer of the loans that are being made are funneled through the secondary market agencies.
Thrifts and banks are offering adjustable-rate mortgages at interest rates that are winning out over those offered by Fannie and Freddie. Also, secondary-market investors are steering clear of derivitive tranches of collateralized mortgage obligations -- a phenomenon that is having an effect of Fannie and Freddie's bottom line, according to Mr. Harting.
Because CMOs are now unpopular, "there is an inverse increase in demand for mortgage-backed security products," says Mr. Harting. "Exacerbating this is a decline in the supply of fixed-rate loans."
An increase in desire for mortgage-backed securities is bringing in spreads in both the MBS and whole-loan market.
That means lower spreads on the new loans coming into Fannie and Freddie's investment portfolio.
One bright spot for the companies would be a less-aggressive stance by banks and thrifts on pricing adjustable loans.
But, the widely anticipated Federal Reserve tightening may be scaring investors away from Freddie Mac and Fannie Mae, "there is the nebulous idea that they trade with rates," said Mr. Harting, adding that a flattening yield curve might actually benefit the companies.
Some analysts feel that Fannie and Freddie are simply becoming the choice of fewer investors.
The theory, espoused by Gary Gordon of PaineWebber Inc., is that strength in the economy is prompting investors to look towards industrial companies -- and to give shorter shrift to the finance sector.
