Fannie Mae's October operating results conveyed negative retained portfolio growth, which is indicative of decreasing purchase opportunities as the most recent refinance boom wanes, analysts said. However, there are some positive highlights, namely the fact that Fannie's total book of business grew faster than expected and its duration gap remained tight. The October results were released last week.

Fannie's retained portfolio dipped by a 5.7% annualized rate in October. Citigroup Global Markets said that this is below Citi's fourth-quarter forecast of a growth rate of over 1%. "Though negative, the shrinkage in the portfolio is not unexpected, as option-adjusted spreads (OASs) have remained very tight over the past weeks, and is consistent with guidance given during the 3Q03 conference call," wrote analysts from Citigroup.

With the strong demand for mortgages, OAS spreads have ratcheted down to the lowest points in more than a year, said Goldman Sachs. This movement reflects the solid demand from banks, the continued presence of funding pressure on the GSE's debt spreads in light of residual "political" uncertainty and the reduced mortgage supply with refinancings tapering off.

Citigroup also noted that the dip in Fannie's portfolio follows the extraordinary growth rate of 107% reported the previous month. Meanwhile, year-to-date growth is at 18.8%. Analysts predict portfolio growth is going to remain modest/negative for the remainder of 2003.

Goldman analysts are also expecting weak retained portfolio growth prospects for the last two months of the year with its outstanding commitments only at $13.2 billion. In contrast, outstanding commitments going into September were $29.6 billion, which was just above portfolio purchases for the month. The GSE's October liquidation rate on the retained portfolio dropped to 40% (from almost 60% in September), while runoff was at $31 billion. Goldman said that liquidation rates in November would need to drop below 20% for Fannie to have positive portfolio growth. This is assuming that all outstanding commitments close.

On a positive note, Fannie's total book of business grew at an annualized rate of 25.6% in October, up from 24.1% the previous month. Citigroup said that since it has become less attractive for Fannie to grow its retained mortgage portfolio, the GSE just opted to grow its guaranty business at a faster pace. Net MBS outstanding also increased at a strong annualized rate of 32.6% in October.

The company's duration gap averaged plus one month in October, unchanged from September. "With the October average duration gap remaining tight, we believe management is effectively managing interest rate risk though a volatile time," Citigroup wrote.

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