Freddie Mac's announcement last week that it will modify the eligible amount for its periodic repurchase operations has sent a message to the mortgage community that the Agency is changing its business strategy.

By reducing the minimum that has to be outstanding after the buyback process, Freddie would have more leeway to "use their cash to buy down debt rather than add assets," said an MBS analyst.

This ability is especially crucial at this point, given the lack of GSE arbitrage in mortgage-backeds (see ASR 5/13/02 p. 18).

"If mortgages are rich in Freddie's view relative to their debentures, they could buy back their debentures to a greater extent than they could without this change in policy instead of adding to their mortgage portfolio," explained the analyst. "But if mortgages are cheap than they could buy mortgages. This just gives them more flexibility."

Previously, Freddie could only buy 20% of the issue size. The modifications now allow them to buy 30% of the issue size, thus reducing the outstanding amounts left after a repurchase operation has been made.

According to the analyst, Freddie has now become a relative value player, which clearly differentiates it from Fannie Mae, which has kept adding to its mortgage portfolio despite the limited GSE arbitrage that is currently available.

This is evidenced by the fact that while Freddie's retained portfolio shrank for the very first time in April by $4 billion, Fannie's mortgage portfolio grew significantly by $6 billion. This is at an annualized rate of 11% (see ASR 5/27/02 p. 15).

The analyst added that the change in policy was most likely the brainchild of Freddie's current senior vice president in funding and investments Gregory Parseghian. Formerly a fixed-income strategist at Credit Suisse First Boston, Parseghian is well-known for his relative-value analysis.

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