Magazine article American Banker

Market Sees Fannie, Freddie Weathering Rate Increases

Magazine article American Banker

Market Sees Fannie, Freddie Weathering Rate Increases

Article excerpt

Though home sales wilt when interest rates rise, investors have stuck by the market's two largest mortgage stocks-Fannie Mae and Freddie Mac.

The Standard & Poor's bank index has plunged more than 10% since the Federal Reserve raised a key short-term rate March 25, but Fannie Mae has lost only 4% of its value, and Freddie Mac has dropped 8.5%. The government-sponsored enterprises invest in more than half of all new-home loans.

Analysts say the two stocks haven't suffered as much as other interest rate-sensitive issues because Fannie and Freddie have shown they can post strong earnings even when rising rates eat into loan volume and profit margins.

"There is some sensitivity of margins, and therefore earnings, to changes in interest rates," said analyst Jonathan Gray of Sanford C. Bernstein & Co., but "it's well-managed, it's moderate, (and) the market perceives that."

When rates rise, the volume of fixed-rate loans favored by the agencies falls as homebuyers turn to the cheaper adjustable-rate mortgages. Fannie and Freddie dominate the fixed-rate portion of the mortgage market, snapping up as much as 85% of new loans, Mr. Gray estimated. By contrast, they buy only 10% of new adjustables; the rest end up in bank and thrift portfolios.

In addition, profit margins on the available loans shrink, and finally, a "modest" mismatch emerges in the durations of assets and liabilities, Mr. Gray said.

How do the agencies counter these effects? …

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