Magazine article American Banker

Performance Outlook Mixed for the Secondary Market

Magazine article American Banker

Performance Outlook Mixed for the Secondary Market

Article excerpt

Stock performance improved in February for Fannie Mae and Freddie Mac, but Sallie Mae, after rallying early in the month, ended February at $36.875, a half-point below where it started the month.

While Fannie Mae outperformed the market and Freddie Mac nearly matched the market's 3.9% rise during the month, the government-sponsored enterprises underperformed a large number of financial stocks that rallied as interest rates declined.

For the shares of Fannie Mae This analysis originally appeared as a research report from Bear Steams. and Freddie Mac, the correlation between stock prices and 30-year Treasuries declined again during February, though the link is still stronger than it was in early 1994. While the impact of changes in interest rates on the two companies' earnings should be slight over time (gains in market share -- and retained portfolio growth -- will drive earnings), there are benefits associated with lower long-term interest rates.

The principal benefit should be the gradual shift in originations from adjustable-rate mortgages to fixed-rate loans.

In addition, lower rates should reduce borrowing costs, which in turn should help margins. We continue to wait for a change in ARM pricing, which should further boost fixed-rate originations, but there has been little change so far.

We are a bit concerned that some S&Ls may actually begin to lower introductory rates again to make their ARMS more attractive relative to the current lower rates on 30-year fixed-rate loans (well under 9% again). …

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