The month of June brought declines for Fannie Mae, as it reported a decrease in retained portfolio holdings by $2.9 billion --- its first dip since February. The portfolio contracted at a 4.6 % annual rate to $730.9 billion. The GSE also agreed to purchase $18.7 billion of mortgage debt for settlement in future months, which remained the same amount from May. Overall, the portfolio has grown at a 0.9% rate for the year, compared with a contraction rate of 19.6% in all of 2005.

More specifically, in June, holdings of the Agency's "own" securities also sharply declined while there was a noticeable increase in its non-agency MBS holdings. According to a recent report by Credit Suisse, the decline of $7.0 billion in portfolio earnings of Fannie Mae's "own" securities corresponded with tight agency OAS levels, while the increase of $4.1 billion in non-agency MBS holding occurred despite historically tight spreads on non-agency HEL floater spreads.

"This suggests that the GSEs may have bought other types of non-agency securities, potentially including conforming balance Alt-A MBS," said Credit Suisse analysts.

There was also an up-tick in purchase commitments to $13.2 billion in the month, which is likely a result of purchases made at June wides in agency OAS levels ---- 13 basis points, briefly, versus a low of six basis points over the month ---- according to Credit Suisse.

These figures come in the wake of the consent order with federal regulator Office of Federal Housing Enterprise Oversight that requires Fannie Mae to limit its portfolio to the December level of $727.2 billion, after making $10.8 billion in accounting errors. Currently, rival Freddie Mac is in discussions with OFHEO and a similar portfolio size cap is expected to be put in place. "We maintain the view that GSE portfolio caps are likely to increase trading volatility as they concentrate more on relative value," said Credit Suisse analysts.

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