Fannie Mae Soon May Attain New Cash Surplus
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Fannie Mae, the biggest American home loan buyer, is close to reaching a new capital surplus and may now halve the monthly pace of cuts to its mortgage holdings through September, according to UBS Securities.
Fannie Mae has already reduced the portfolio by $96.3 billion this year to help reduce its capital requirements and raise cash. A capital surplus of 30% over its standard minimum was mandated after its regulator in September found the company broke rules in accounting for hedges on its portfolio.
The company may reduce the portfolio by $11.4 billion to $12.8 billion each month this quarter, compared with drops of $23.9 billion in May and $19.9 billion in June, a New York-based mortgage strategist at UBS, William Smith, wrote in a research note.
“Fannie Mae needs to reduce its mortgage portfolio by only $4.7 billion a month for each of July, August and September,” he wrote. “However, we see absolutely no reason for Fannie Mae to run the risk of being undercapitalized as of September 30, particularly given the potentially enormous political damage if it were.”
With about $36.4 billion in capital in June, Fannie Mae was probably $2.5 billion short of what would be needed to meet a 30% surplus over a $29.9 billion minimum, according to UBS calculations. The Washington-based company will likely raise its capital to $38.6 billion by September, satisfying the surplus over an expected $29.7 billion minimum, UBS said. The yield on the current coupon 30-year mortgage bond issued with a Fannie Mae guarantee is 5.4%, or 1.1 percentage points more than 10-year Treasuries. The spread is 0.11 points higher than in December, indicating weaker demand.
The Senate Banking Committee last week approved a bill that would strengthen regulation of Fannie Mae and Freddie Mac, and may result in further reductions to the combined $1.5 trillion in holdings. Smaller portfolios have been advocated by Federal Reserve Chairman Alan Greenspan and Treasury Secretary Snow, who say the investments serve no purpose for the housing or mortgage-backed bond markets.
