A recent government study of the Federal Home Loan Bank System holds some broad implications for the mortgage business, says Peter Treadway, an analyst at Smith Barney, Harris Upham & Co.

Mr. Treadway discussed the report by the Congressional Budget Office in an advisory for investors.

An excerpt from his report follows.

In order to generate earnings, the federal Home Loan banks have begun to use their agency status in the debt markets to buy mortgage-backed securities.

From zero at the end of 1987, mortgage-backed holdings by the Home Loan banks grew to $22.8 billion by yearend 1992.

If this trend is allowed to continue, the banks will prove to be deadly competition for the nation's thrifts - the banks' own nominal owners and the very institutions they are supposed to be helping - and will reduce the value of the "duopoly" of Fannie Mae and Freddie Mac.

The reasoning here is simple: The Home Loan banks are using their agency status in the debt markets to raise funds at roughly 25 basis points over Treasury and reinvest them in the mortgage-backed market al roughly 70 basis points over Treasury.

Another Enterprise

This form of risk arbitrage, by definition, creates a third government-sponsored enterprise that is buying mortgages and funding al agency rates in the capital markets.

If this trend persists, we will have to start referring to Fannie and Freddie as "triopolists" rather than "duopolists." It is true that Fannie and Freddie will benefit, inasmuch as their mortgage-backeds are bought by the Home Loan banks.

But, from the viewpoint of their shareholders, this Positive is Probably outweighed by the fact that, with the Home Loan banks as a third mortgage-buying enterprise, mortgage spreads will be driven down further and Fannie and Freddie's own portfolio growth and/or spreads will necessarily be lower than they otherwise would have been.

Same Goes for Thrifts

This also applies to the thrifts that will be directly competing with their Home Loan bank "subsidiaries." And the positive side for Fannie and Freddie might eventually go away anyway.

Longer term, as the Home Loan banks' mortgage-backed portfolios grow, one might logically expect the banks to develop their own expertise and launch their own mortgage-buying programs for portfolio.

There is one group of winners in all of this: the mortgage bankers. From their perspective, having another government-sponsored monster to which they can feed mortgages in the secondary market is a dream come true.

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