WASHINGTON - Are spreads on new mortgages purchased by Fannie Mae and Freddie Mac in a long-term decline?

Debate heated up last week as two stock analysts tackled the issue in new reports about the narrowing spread between the interest the agencies pay for funds and they interest they collect.

The question was raised two weeks ago by analyst Jonathan Gray of Sanford C. Bernstein & Co., who argued that aggressive portfolio purchases by the two agencies are pushing down spreads.

But in a report on Fannie Mae issued Aug. 9, Steven Eisman of Oppenheimer & Co. said spreads on new mortgages remain "slightly lower" than previous levels.

Mr. Eisman said he was unsure if lower spreads represent a long-term trend, or continue because mortgage originations are below the unusually high levels of refinancings in 1992 and in 1993.

In another report, David Hochstim, an analyst at Bear Stearns & Co., argued against the trend. Though initial spreads on new mortgages have fallen from the levels of refinancings, he said overall returns on investment are hardly changed.

"Purchases made when the yield curve is steeper may provide slightly higher initial returns, but lower returns later on. The overall returns, however, are hardly changed from current levels," Mr. Hochstim wrote.

The issue is important because most of the earnings at both agencies now come from interest income on their mortgage portfolios. Together, their portfolios total about $335 billion.

Mr. Gray's concern is that as loan purchases by the agencies account for an increasing share of the growth in mortgage credit, Fannie Mae and Freddie Mac are pushing down spreads on these loans.

Mr. Gray also argued that falling spreads would make earnings growth at the two agencies more vulnerable to rising interest rates.

He recommended that investors reduce their exposure to the stocks of both agencies.

Unlike Mr. Gray, Mr. Eisman maintained his "buy" rating on Fannie Mae stock because spreads are still wide, he said. Mr. Hochstim raised his rating from "attractive" to "buy."

Spreads on new mortgages fell to historic lows earlier this year as the supply of fixed-rate loans that the agencies chiefly buy dropped drastically.

In Mr. Eisman's model, using the yields on five-year Treasury instruments to measure spreads on agency debt and mortgages, spreads fell 150 to 190 basis points in 1992 to a low point of 70 basis points in January 1995.

Beginning in the spring, spreads steadily increased to their current level of 115 basis points, still below the normal level of 120 to 130 basis points, Mr. Eisman wrote.

Paul Scarpetta, vice president for shareholder relations at Freddie Mac, criticized Mr. Eisman's model as oversimplified because it uses only one kind of instrument to measure mortgage yields and debt costs. In fact, both agencies use a wide range of instruments to fund their purchases.

Mr. Scarpetta said the same problem afflicts Mr. Gray's analysis of business conditions at the agencies.

And more fundamentally, he argued, though initial returns are lower now than they were during the refinance boom, returns on equity on mortgage purchases remain around 22% or 23%.

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