WASHINGTON - A leading securities analyst is predicting that mortgage spreads at Fannie Mae and Freddie Mac are in a long-term decline that will depress their earnings growth. He has downgraded the stocks to "market perform."

Though business is booming now, analyst Jonathan Gray of Sanford C. Bernstein & Co. believes the longer-term outlook is more mixed.

His basic argument is that aggressive portfolio growth at the agencies is driving down mortgage prices and return on equity more than anticipated.

"Their ability to deliver high and stable returns on investments may be declining with their increased size relative to the market they serve," Mr. Gray wrote in a report last week.

The agencies are financing a whopping 35% of the growth in fixed-rate mortgage debt, Mr. Gray noted, while the overall mortgage market is growing at a rate of only 6%.

This is driving down prices. As a result, longer-term return on equity for the stocks may be closer to 20% than 25%, and their earnings-per-share growth may average 10% to 12% rather than 12% to 15% over the next five years, he added.

Another casualty of thinner spreads will be the agencies' capacity to withstand interest rate volatility, according to Mr. Gray.

That's because rapid loan growth is often used to counter margin pressure when rates rise. The effectiveness of that strategy "would be blunted with thin marginal spreads," Mr. Gray said.

Mr. Gray traces aggressive portfolio growth at Fannie Mae and Freddie Mac to favorable capital standards promulgated in 1992. The agencies, formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., are required to hold only half the level of capital of federally insured banks and thrifts.

Rapid portfolio growth came just in time to provide an alternative avenue for capital investment, as the growth in mortgage-backed securities slowed dramatically in the early 1990s, Mr. Gray noted.

Spreads on new mortgages over the past nine months have fallen to a historical low of between 0.65% and 0.75%. By contrast, spreads on new mortgage investment ranged from 0.93% to 2.06% from 1986 through the third quarter of 1994.

Mr. Gray attributes that decline to the spike in rates last year.

In that environment, banks and thrifts were able to push down spreads by pricing off their average cost of funds, which lags behind the market rate. Also, adjustable-rate mortgages - of which Fannie and Freddie get only a small share - became dominant in the market.

As fixed-rate volume dried up, the agencies' purchases drove up prices, pushing down yields and spreads, Mr. Gray said.

In the near term, Mr. Gray believes that conditions at Fannie and Freddie are very favorable, as the drop in rates leads to a resurgence of fixed-rate lending.

A plan to replenish the thrift industry's insurance fund may also stimulate mortgage sales to the agencies as thrifts shed assets to comply with capital standards, Mr. Gray argued.

By early 1996, Mr. Gray believes faster economic growth will prompt the Fed to raise rates, which will lead to a replay of last year. He believes loan growth at the agencies will slow as ARMs become more popular, and mortgage spreads will fall.

That scenario would test Mr. Gray's hypothesis of increased risk at the agencies.

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