Last week Freddie Mac reported weak February numbers, in direct contrast to rival Fannie Mae, which just released its monthly numbers the previous week. Freddie's results were characterized by a sharp drop in its retained portfolio and in its MBS PCs outstanding.
The GSE's retained mortgage portfolio contracted at a 14.7% annualized rate to $561.5 billion last month. This is compared to an increase of 0.7% in January, 41% in December and 15.5% for the entire of last year, said Sandler O'Neill. Retained portfolio commitments were also flat at $9.3 billion compared to $8.2 billion in January.
Mike McMahon from Sandler finds it interesting that Freddie's total mortgage portfolio - which comprises the sum of its on-balance sheet mortgage portfolio of $561 billion as well as its off-balance sheet guaranteed MBS portfolio held by third parities of $739 billion - has dipped for two consecutive months. The decline was 2.2% and 7.8% for January and February, respectively. On the other hand, rival Fannie's total portfolio has increased by 28.3% (January) and 22.6% (February).
McMahon said that is not uncommon for Freddie or Fannie to have low or negative retained mortgage portfolio growth while also having higher total mortgage portfolio growth, which reflects buysiders buying a bigger share of the business volume generated during the period. But, "the fact that Freddie Mac experienced negative total growth implies that the company is losing market share to Fannie Mae," said McMahon. "Based on each company's relative share of their combined monthly business volume, Freddie Mac is clearly generating consistently less volume than a year ago." He noted that Freddie's share of the combined $154 billion of business was only 31%, which is a significant drop from 47% a year ago.
Meanwhile, Freddie's PCs outstanding dipped at a 10% annualized rate to $1.07 trillion. Analysts said that this is mainly due to the loss of the firm's exclusive partnership with Bank of America. The firm also had some operational problems, that would include "some push-back from the increased pricing on Alt-A/A-minus loans," according to JPMorgan Securities equity analysts. Freddie has also mentioned that it is experiencing problems with its on-line pricing system for Alt-A product, making it more difficult for lenders to use, costing the GSE some market share in the near-term.
Aside from these, liquidations remain high considering lenders are still stretching out deliveries due to the wide spreads available for holding loans short term, said Merrill Lynch analysts.
Sandler's McMahon stated also that some MBS issuers might be choosing to issue securities under Fannie Mae's guarantee because of better pricing caused by higher prepayment rates on Freddie's securities. He noted that prepayments were pegged at 61.3% on the firm's securities relative to Fannie's 46.1%. This is a trend that has been going on for several months.
Despite Freddie's weak February results, analysts think this is merely a short-term problem. "We regard this weakness as short term, and expect Freddie to hit its stated retained portfolio growth target of 8% to 12% for the year," wrote Merrill Lynch researchers.
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