Last week, Freddie Mac released its December monthly volume summary and as expected, the GSE reported a drop in its retained portfolio as well as a modest increase in its guaranty business. Analysts believe that Freddie Mac is well positioned to take advantage of the more attractive spreads on nontraditional products, although MBS-to-debt spreads are still tight.
Freddie disclosed that its total mortgage portfolio grew at an annualized rate of 7.2% in December. However, its retained portfolio dropped by an annualized 6.1% rate compared to the previous month, attributed to the continuously high liquidations, as well as securities sales. Also, retained portfolio purchases dropped slightly to $18 billion from $18.8 billion in November.
Retained portfolio sales - at $6 billion in December - rose beginning November and would probably stay high. JPMorgan Securities analysts said that the elevated number is due to the fact that some of the market-making transactions made by the GSE's dissolved Securities Sales & Trading Group were transferred to the retained portfolio unit.
Driven by the buying of nontraditional mortgage products, the GSE's commitments increased significantly to $17.1 billion from November's figure of $7.7 billion. JPMorgan noted that MBS-to-debt spreads are still quite tight because of the demand from other investors such as hedge funds, foreign buyers, as well as depositories. The outlook, said analysts, is for continued slow growth in the near-term, although nontraditional product purchases would spur portfolio growth slightly.
Freddie's outstanding MBS increased to $1.2 trillion as of year-end 2004 from $1.16 trillion at the end of 2003, a 3.7% annualized increase, making 2004 growth total 4%. JPMorgan said that this growth has been hindered by the popularity of private-label securitizations caused by the higher percentage of nontraditional products in the mortgage market. However, analysts said Freddie's guaranty business is expected to benefit from further yield curve flattening, which would make the 30-year conventional fixed-rate mortgage more popular.
Freddie Mac also disclosed that its REMIC volume dipped by a significant 36% from the previous month because of the yield curve flattening that has led to decreased demand for structured cash flows. Volume dropped 28% in 2004, compared to 2003, which would probably negatively impact Freddie's fee-income business. JPMorgan analysts predict that this will continue trailing off into 2005 as the Fed tightens and the yield curve flattens.
On a positive note, credit quality and interest risk remain solid. Freddie Mac reported that delinquencies remained flat at 24 basis points of non-credit enhanced loans, although delinquencies rose six basis points to 2.76% of credit enhanced loans. This may be partly attributed to seasonality, researchers stated. Portfolio market value sensitivity averaged 2%, staying unchanged from the previous month. Meanwhile, interest rate risk is still relatively low, with the duration gap at negative one month versus zero months in November.
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