As the mortgage industry slumps, Fannie Mae and Freddie Mac are finding some intriguing ways to boost profits.
In a strategy that one analyst has dubbed "mortgage juggling," the two titans are buying up growing amounts of outstanding mortage securities that they have guaranteed.
They are then holding the assets in their portfolios.
The result: Instead of earning guarantee fees of about 20 basis points on the securities, the agencies earn an interest spread of roughly 90 basis points, says Salomon Brothers analyst Bruce W. Harting.
The agencies' "ability to execute these transactions as yet another advantage that they have to sustain balance sheet growth whenever the economy slows," Mr. Harting wrote in a recent report.
Citing attractive prices, Fannie and Freddie bought up $13.4 billion and $8 billion of their own securities, respectively, by July 31 this year.
Their total portfolio purchases in that period were $42.1 billion and $13.5 billion, respectively.
By contrast, mortgage-backed securities made up only $4 billion of the $92 billion in portfolio purchases last year by Fannie Mac, or the Federal National Mortgage Association.
And Freddie Mac, or the Federal Home Loan Mortgage Corp., bought $10 billion of its own securities last year, out of $30 billion in total portfolio purchases.
"We have definitely bought more" mortgage-backed securities this year than last, said Thomas A. Lawler, senior vice president of portfolio management at Fannie Mae.
He cited several reasons.
"The absorption rate of what's going into REMICs has fallen sharply," said Mr. Lawler, referring to real estate mortgage investment conduits.
"A number of dealers who hold mortgage-backed securities feel the likelihood of REMIC [deals] has decreased and decided to sell."
At the same time, he said, banks that have been heavy investors in mortgage-backed securities are trimming their holdings, as demand for business and consumer loans picks up.
And investors re-evaluating the risks of investing in mortgages, after interest rates rose and prices plunged, are also contributing to the healthy supply, Mr. Lawler said.
"We tend to be opportunistic and buy products that trade poorly.
It helps the products look good," said Brian Brandenburg, director of portfolio management at Freddie Mac.
Unlike many of the investors who were burned by their exotic holdings, Fannie Mae sticks to "boring," relatively simple, structures in its purchases.
"We hate risk," Mr. Lawler said.
Will this trend continue next year?
"If rates keep rising and REMIC demand [stays] low. I'd say 'yes,' "said Mr. Lawler.
"On the other hand, if the mortgage sector returns to favor, and spread between debt and mortgage return is thin, I'd say 'no.'
