A rise in the cost of debt in July and August put a crimp in Freddie Mac's mortgage buying.
Freddie's cost of long-term debt has risen 30 basis points, to 6.12%, from 5.82% at the end of the second quarter. Salomon Smith Barney analyst Thomas O'Donnell said in a research note. Mr. O'Donnell said that the difficult rate environment led Freddie Mac to lower its commitments to purchase mortgages to $6.5 billion, from $8.9 billion in July.
Analysts look at the cost of long-term debt for Fannie Mae and Freddie Mac because it affects the companies' margin. The higher the cost of debt, the more the margin is compressed. Lately their debt costs relative to Treasuries have widened.
"The rise in the effective rate of long-term debt is due to the repricing feature of synthetic long-term debt," said Joel J. Houck, an analyst with A.G. Edwards & Sons Inc. in St. Louis. Now the cost is very high, but Freddie is buying "future rate protection and they're having to pay up for it in the market."
Mr. Houck said he expects only "slight margin compression," and that it will be offset by future growth in Freddie's mortgage investments.
Unfavorable market conditions have pushed long-term debt rates up, Mr. O'Donnell said. He cited the high cost of using swaps to convert short-term debt to long-term debt. And because of year-2000 concerns, the cost of borrowing for maturities beyond 2000 has risen, he said.
Freddie reported that its retained mortgage portfolio grew 3.7% in August, for an annual growth rate of 24.5%. Mortgage investments drive earnings growth for both Fannie and Freddie.
Freddie's retained portfolio stood at $306.2 billion at the end of August, up from $206.8 billion a year earlier.
Fannie Mae also faced widening spreads -- but was buying securities with different maturities, Mr. O'Donnell said. In August, Fannie had "very rapid" annualized mortgage portfolio growth at 35.5%.
Thirty-year fixed-rate mortgages are the most popular investment for Freddie. The purchaser of home loans bought $229.6 billion of these mortgages along with $51.1 billion of 15-year fixed-rate mortgages, and $12.8 billion of adjustable-rate mortgages.
To date, Freddie has guaranteed a total of $527.4 billion of mortgages.
In July, single-family delinquencies improved by 1 basis point, falling to 0.40%, Mr. O'Donnell said, noting that this represents the lowest level in the history of the company. In January, delinquencies were 0.51%.
In August, structured securitizations also rose, to $6.3 billion, from $3.2 billion in July, but were still significantly lower than January's $22 billion. Some of this growth comes from an increase in subprime loan purchases, Mr. Houck said.