Fannie Mae is on track to meet its September deadline to reach the 30% capital surcharge set by the Office of Federal Housing Enterprise Oversight, UBS analysts said in a report released last week. This is why concerns about a massive portfolio selling by Fannie are "misplaced," analysts added.

Estimating the extent to which Fannie Mae needs to decrease its portfolio between now and the GSE's September deadline, the 30% capital surcharge will be equal to $9.29 billion with the effective capital charge at 3.25%. The GSE has a $4.04 billion capital surplus and will be internally accumulating an additional $1.7 billion per quarter or $3.4 billion for the next two quarters, leaving a $1.85 billion capital deficit. In April, Fannie Mae reduced its portfolio size by roughly $12.5 billion, leaving under $45 billion in necessary reductions, out of the $57 billion it needed to shed as of the end of March. In order to achieve this, Fannie will have to reduce its portfolio an average of $9 billion per month, which is less than the $13 billion a month that Fannie shrunk in the first four months of the year.

And even with the market rallying significantly since the end of the first quarter -- negatively impacting the GSE's capital position due to the derivative hedges that have to be marked-to-market - the shrinkage will still have to be only about $13 billion a month which is the level that Fannie has averaged this year.

"Our numbers suggest that the portfolio reductions which Fannie Mae absolutely must do are less than the reductions they have done thus far this year; hence we view with credulity OFHEO's statement that Fannie is on target to meet the September requirement," wrote UBS analysts. "In fact, we believe that portfolio reductions are apt to continue at the current pace, as the market has rallied considerably since the end of March, requiring larger mark-to-market losses on its hedges."

UBS's analysis effectively rules out the market speculation that Fannie might need to significantly lessen its mortgage holdings just to meet its Sept. 30, capital requirements, thus negatively impacting mortgage buying. Analysts also noted as positive the passing of the Baker-Oxley Bill (H.R. 1461), the House of Representative's version of the GSE Reform Bill. This is seen as GSE-friendly as it excludes caps on GSE portfolio growth of any kind.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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