Fannie, Freddie Go to Town In a Market Ripe for Them

Fannie Mae and Freddie Mac, strong buyers of mortgages throughout the year, have bolstered their mortgage portfolios in response to a tremendous widening in spreads this fall.

Together, Fannie and Freddie's purchases grew almost 32% from the August total, to $29.9 billion in September. Commitments to buy mortgages for their portfolios also jumped, to $38 billion-breaking January's record by almost $9 billion-according to Inna Koren, first vice president at Prudential Securities.

Fannie and Freddie have two business lines; they are both investors in and insurers-or guarantors-of loans for sale in the secondary market. As investors, they buy mortgages for their portfolios.

The investor side of the business has blossomed this fall because the spread between agency paper and mortgages has "widened dramatically in the last month or so," Ms. Koren said. This has enabled Fannie and Freddie to buy mortgages and mortgage-backed securities at more attractive rates.

In the last six weeks, spreads on new mortgage products have "exploded," creating the right conditions for Fannie and Freddie, said Jonathan E. Gray, principal at Sanford C. Bernstein & Co.

"Right now they have the wind at their backs," he said. "Not only do they have tons of volume, but the spreads on that volume are off the page." Fannie and Freddie's growth will account for 35% to 40% of the entire mortgage market's net growth, he added.

The bulk of the increase in commitments was reported by Freddie Mac. Its September commitments to buy mortgages grew to $22 billion, more than a doubling and outpacing Fannie Mae's commitments by $6 billion, Ms. Koren said.

Meanwhile, some traders observed that Freddie Mac was just as active a buyer in October, she said.

But Freddie was not alone in its pursuit of mortgages. Fannie Mae was on an "unprecedented" pace of mortgage commitments in October, greater than in any month of the last two decades, said James A. Johnson, chairman and chief executive officer. Fannie's mortgage portfolio grew 25.2% in September, he said.

Combined, Fannie and Freddie's portfolios have grown 27.7%, to $592.6 billion, during the last 12 months, Ms. Koren said. Individually in the past 12 months, Freddie's portfolio has grown 37.8%; Fannie's, 20.8%.

Freddie, however, can be expected to add at a faster rate to its portfolio, whose absolute size is less than 58% of Fannie's, Ms. Koren said. Freddie's portfolio totals $216.5 billion, and Fannie's, $376.1 billion.

Fannie should capture a 57% share of total purchase volume this year, and Freddie, 43%, Mr. Gray forecast.

For 1998, Fannie Mae's portfolio will have grown by about $74 billion, to $390 billion, Mr. Gray predicted. Freddie began the year with $164 billion and will end up with at least $225 billion, he said, for at least a $61 billion increase.

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