Lex: Fannie Mae Premium

Bit by bit, Fannie Mae is emerging from under the regulatory and accounting clouds that have dogged it. Thursday provided another milestone, with the publication of a long-awaited investigation into the US mortgage giant’s accounting issues. The report was good news. It contained no further bombshells and made no significant additional recommendations, thanks to the current management’s swift embrace of necessary changes. The upshot should be less political pressure to limit in some way the clout of Fannie – and sister agency Freddie Mac – and tone down concern over the size of their mortgage portfolios.

As the political mood eases, it could be easier for Fannie to resume growing, in spite of the administration’s concerns. For one of the ways that Fannie had complied with its regulator, following its accounting scandal, was to reduce the size of its huge portfolio over the course of the past year. Luckily for Fannie, it was selling into a receptive market as banks and thrifts, which originate the mortgages, were holding on to many of their mortgage-backed securities rather than selling them on into the secondary market. This worked to Fannie’s advantage as it moved to sate the robust demand for these assets from overseas buyers.

Now that Fannie has rebuilt its capital – capital which regulators require to support its mortgage portfolio – it can consider growing again. Once more, timing could be on its side. With the flatter yield curve, banks may be less keen to hang on to their mortgages and mortgage-backed securities. A further fillip for Fannie might be a waning in popularity of adjustable rather than fixed rate mortgages, since banks are even more likely to hang on to the former. After its recent spell in the dog-house, things could be looking up for Fannie.

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