With Fannie Mae's recent announcement of its capital plan, fears of a "massive MBS selling" have been alleviated. Analysts said that Fannie's portfolio runoff seen in January exceeded the amount needed for the capital plan, and was more a product of tight spreads between mortgages and agency debentures. Furthermore, the capital plan, coupled with the extension granted by the Office of Federal Enterprise Oversight for the GSE to meet the required 30% capital surcharge or target, also removed a lot of market uncertainty.
"FNMA's sales of its mortgage holdings were driven by tight valuations and not due to capital considerations," wrote Lehman Brothers researchers, adding that aggressive Fannie Mae portfolio sales are "unlikely." Lehman called the OFHEO's extension a "positive development" for the mortgage market because it further limits the possibility of any "fire-sale" of assets by Fannie. Analysts noted that core earnings for the GSE have been approximating $2 billion per quarter. A one-quarter extension for Fannie Mae to meet its capital target should raise about $1.8 billion of additional equity, which is equal to a $75 billion portfolio reduction. "While we had always discounted the likelihood of any aggressive portfolio sales by Fannie Mae, this extension makes that event even less likely," said Lehman.
Researchers added that MBS investors also seemed concerned about Fannie Mae's $14 billion portfolio reduction in January, especially the $6 billion of outright sales, as buysiders feared that this is an indication of a liquidation trend going forward. Lehman said that even assuming a 2.5% equity charge, $6 billion of portfolio sales would raise $150 million of capital, which could be considered inconsequential. Additionally, rival Freddie Mac has also been actively selling mortgages over the recent months "We simply view this as an indicator of rich mortgage valuations and expect the GSEs to be marginal sellers of mortgages over the coming months at current spread levels," Lehman said.
Citigroup Global Markets said that Fannie would need to reduce its retained portfolio to $825 billion by the end of September - the deadline for reaching their capital target - from $890.8 billion reported at the end of January. This is equivalent to a $65 billion reduction over an eight-month horizon, or about $8 billion per month. This is in contrast to recent portfolio paydowns of $17 billion to $20 billion per month in the last six months. Thus, Fannie could be a net mortgage purchaser and still meet the required capital level by the September deadline, Citigroup analysts added.
In contrast, in a report released Wednesday, JPMorgan Securities MBS analysts contested claims that recent sales from Fannie's portfolio were nothing more than "standard" profit taking resulting from tight spreads. They noted that Fannie's January sales were unprecedented, more than doubling previous sales. Although Freddie Mac also did some selling in January, this was nothing out of the ordinary for the rival firm, claimed analysts. Unlike Fannie, Freddie had forward commitments that were in excess of sales, suggesting that it was reinvesting paydowns.
The firm's MBS analysts also attacked equity research from competing Street firms claiming that Fannie has completed its capital replenishment, and might not even have enough room to grow its portfolio further, despite a dip in the portfolio and narrower margins - assumptions based on estimates for record retained earnings. "There may be a short-term increase in retained earnings due to gains on MBS sales," JPMorgan researchers said. "However, historically, mark-to-market on the derivative positions has been a major factor on retained earnings (and difficult to predict)." They added that if Fannie has already met its capital target, why would the OFHEO extend the deadline to meet the capital surcharge. JPMorgan researchers said that they stand by their estimates for a gradual portfolio dip through September, a theory based on public information as well as historical earnings.
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