Fannie Mae and Freddie Mac are required to reduce their mortgage portfolios by 10% every year beginning next year, until each of the two mortgage portfolios reaches $250 billion.

Bank of America Merrill Lynch analysts estimated that the GSEs will need to shrink their portfolios by a combined $155 billion because of the  the 10% requirement, and an added $110 billion to make up for the growth in the portfolios because of buyouts.

Assuming portfolio runoffs to the extent of 10% to 15% CPR, BofA Merrill analysts believe that the GSEs would need combined MBS sales of approximately $80 to $140 billion in 2010. They think that they will sell agency MBS, specifically the richer coupons or the 5s and 5.5s.

The analysts explained that  the sales of agency MBS is not the same as the net demand from the GSEs. Net demand is actually the amount by which the portfolio needs to be reduced or $155 billion.

Single family loans/securities make up about 80% of the GSE mortgage portfolios, and analysts think that agencies are probably going to reduce the size of single family portfolio to meet their portfolio size constraints.

A significant factor in 2010 will be portfolio growth because of buyouts of delinquent and modified loans from the MBS trusts held by third parties.

They project that buyouts in the next year will be around $75 billion for Fannie Mae and $35 billion for Freddie Mac.

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