Fannie Mae (FNM) and Freddie Mac (FRE) are enjoying some of the most favourable spreads on their mortgage investments in at least a decade. But don’t think this means the companies are out of the woods.
Bloomberg: The current-coupon mortgage bonds Fannie and Freddie buy yield about 40 basis points, or 0.40 percentage point, more than what they pay to borrow by selling benchmark bonds, according to Citigroup Inc. The difference exceeded 20 basis points only twice in the 10 years through 2007 — in 1998 and 2003.
Alas, this doesn’t count for much. Both firms are reducing the size of their mortgage portfolios, meaning that that purchasing activity will likely slow. What’s more, new investments make up only a small percentage of the firms’ total holdings. For Fannie Mae, for example, the firm’s purchases year to date account for only 3.9% of the firm’s balance of mortgages at the end of Q2.
Also, with Fannie and Freddie reporting multi-billion-dollar write-offs each quarter, a few hundred million of additional profit on spreads is a drop in the bucket.
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