A further evidence of the current lack of GSE arbitrage (see ASR 5/13/02 p.18), Freddie Mac announced last week that in April, for the very first time, its mortgage investment portfolio shrank.

The GSE's retained portfolio decreased by $4 billion (at an annualized rate of 10.3%) to $521.6 billion last month.

Freddie officials said that with the significant amount of prepayments, it has been more difficult for the firm to grow assets as it has historically. This is coupled with the fact that mortgage-agency spreads have remained relatively tight lately.

Robert Burns, director in mortgage funding at Freddie, said he would estimate that Freddie's purchase volume would continue to remain subdued for as long as the current conditions are in place. This is in line with Freddie's policy to grow its portfolio on an opportunistic basis. Freddie has been known to buy in size when spreads are wider and when purchases meet their established thresholds.

"When we cannot add assets to our portfolio that results in attractive returns to shareholders, we have always said that we reserve the right not to do so," said Burns. "I think it demonstrates a commitment on the part of Freddie Mac to responsibly manage capital. We are going to continue on the path of disciplined capital deployment and if mortgages are too tight for us to buy in the appropriate fashion then I believe we will step back from that."

What about Fannie?

Fannie Mae's portfolio, on the other hand, grew significantly last month. It went up at an annualized rate of 11% (a $6.2 billion increase) in April, compared to a low of 2% in March, according to a report by Salomon Smith Barney. However, Salomon said that the 11% growth rate remains below average as the Agency expects portfolio growth for this year to be around the 16% growth rate seen in 2001.

But the fact that Fannie's portfolio grew while Freddie's shrank does not mean that Freddie will be left behind.

At the beginning of this year, Freddie expected to grow their mortgage portfolio by 18%. Analysts said that the fact they had stepped back last month does not necessarily mean that they would miss their growth target. In fact, Freddie's total mortgage portfolio still grew at an annualized rate of 19% in April. This is because Freddie had made some aggressive purchases in January and February, affording them the leeway not to buy as much in March and April. However, the GSE would not have as much leeway going forward, noted some experts.

According to a research by JPMorgan, based on the reported commitments, analysts expect Freddie's retained portfolio to dip by more than 1% in May. But even if Freddie's retained portfolio decreases by another 1% in May, the annualized growth rate for the first five months of this year will still be well above 10%, stated the report.

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