Freddie Mac has set the stage for continued rapid portfolio growth with last week's decision to issue up to $500 million of preferred stock, analysts said.
After adding almost $35 billion to its mortgage portfolio last year, the government-sponsored enterprise must tap the capital markets this year to keep up the pace. Freddie Mac, formally the Federal Home Loan Mortgage Corp., said it expects to issue most of the preferred stock in 1996.
Analyst Gary Gordon of PaineWebber Inc. projected that Freddie would expand its loan portfolio by $30 billion this year. At that rate, the agency would absorb all the $950 million of new capital generated through retained earnings, he said.
If Freddie added loans to its portfolio more rapidly, as it did in the fourth quarter of 1995, and again in January, it would need more capital. The agency added loans to its portfolio at an annualized rate of $50 billion during those months.
At the end of 1995, Freddie Mac's portfolio totaled $107.4 billion.
To prepare for an alternative, slower-growth scenario, Freddie Mac's board also authorized the repurchase of up to $1 billion of the agency's common stock, or about 6.7% of its 178.8 million shares outstanding.
"The common stock repurchase authorization gives us the flexibility to return surplus capital to shareholders in periods when fewer growth opportunities are available," said John P. Gibbons, acting executive vice president and chief financial officer.
In the wake of last month's increase in long-term rates, analyst Bruce Harting of Salomon Brothers Inc. said the buyback offer should reassure investors that Freddie has a hedge against rising rates.
"In the worst case, if '96 were to be a repeat of '94, with rising long- term interest rates and mortgage loan volume drying up, here is a way to maintain mid-teens earnings growth," Mr. Harting said. "I think it was a very, very good tactical announcement."
But analysts do not expect Freddie Mac to repurchase stock this year or, some say, even in 1997.
"Over the long run, Freddie will begin to grow its loan portfolio at a slower pace than its capital base," said Mr. Gordon of PaineWebber. "Therefore, like Fannie Mae, Freddie Mac should eventually be repurchasing common shares each year."
Freddie Mac's decision to restructure its capital came just two months after a similar move by Fannie Mae, formally the Federal National Mortgage Association. The larger mortgage agency announced plans to issue $1 billion of preferred stock and use some of the proceeds to repurchase its common shares.
Fannie also instituted a four-for-one stock split in a bid to lure small investors into the stock.
At the time, Freddie Mac said it planned no capital restructuring. But one analyst said Fannie Mae had paved the way for Freddie.
"What happens is, one of the GSEs will stake out new territory; the other will see what's going on and then, if it makes sense, follow suit," said Thomas O'Donnell of Smith Barney. "Freddie saw how the market reacted to what Fannie did, (and) the market really liked what Fannie did at the end of the year."