Aside from reporting higher-than expected earnings and lowering guidance for the remainder of the year, Fannie Mae last week discussed its decision to grow its portfolio in the second half of the year via lower-margin ARMs. The firm also expressed its concern regarding the credit risk found in private label mortgage-backeds, including Alt-A and subprime loans.
At Fannie's earning conference call held last Wednesday, there was considerable discussion about the shift in portfolio purchases toward ARM products, which will cause margin contraction. Loans Fannie currently places on the books have significantly less initial spread compared to the past, said analysts from Friedman Billings Ramsey (FBR). The increase in the cost of debt resulting from maturity extension will lead to increased margin compression sooner than expected.