Magazine article American Banker

Analyst Less Concerned over Agencies' Pricing

Magazine article American Banker

Analyst Less Concerned over Agencies' Pricing

Article excerpt

Analyst Jonathan Gray has revisited his controversial position that profit margins on mortgage purchases by Fannie Mae and Freddie Mac are in a long-term decline - and this time he sees a brighter picture.

"New evidence on mortgage spreads mutes our concern that a secular decline in the spread on new mortgage investment might be under way," the Sanford C. Bernstein & Co. analyst wrote in a report last week.

Last summer, Mr. Gray argued that aggressive loan purchases by the agencies was driving down mortgage prices and return on equity more than expected. He predicted depressed earnings growth as a result.

What has changed his thinking?

Consumers are indeed paying less for their mortgages in relation to borrowing costs at the two agencies, Mr. Gray writes. But the decline in margins is eating into the profitability of mortgage bankers and other lenders, not mortgage investors such as the agencies, he says.

By focusing on the yields of Fannie Mae mortgage-backed securities rather than the rate paid by consumers, Mr. Gray concludes that while margins on agency mortgage purchases have shrunk since 1994, the declines are not alarming, and probably not long term.

The spread between investor yields and debt costs declined to 1.14% in 1994, against an average of 1.33% over the preceding eight years. It fell to 0.83% in the first quarter, but rebounded smartly to 1.02%.

By contrast, the spread between consumer mortgage rates and debt costs has fallen more drastically - to 0. …

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