The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have the Treasury's unlimited support and no need to reduce to their portfolios. But what does that really mean for the GSEs and how they move ahead?
In late December, the Treasury Department announced it would provide unlimited support for Fannie Mae and Freddie Mac through 2012, basically extending the conservatorship for another few years. As part of that announcement, the Treasury also made it easier for the GSEs to manage the size of their portfolios. Originally, the plan was that 10 percent of the companies’ existing portfolios had to be jettisoned annually, beginning this year. But the December announcement changed that figure to 10 percent of the maximum allowable portfolio cap of $900 billion per institution.
In short, the GSEs can, if they want, increase the size of their portfolios. For instance, Freddie Mac’s portfolio is about $755 billion. So, instead of having to end 2010 with a portfolio of $679.5 billion, they need to end the year at $810 billion.
Technically, that means that the GSEs can offer more portfolio loans at better prices than they have since being seized by the federal government. But in practice, the GSEs’ focus on their securitization platforms won’t diminish anytime soon; neither is in any rush to hit their maximum allowable limit. And the securitized executions—Fannie’s MBS and Freddie’s CME programs—will most likely continue to be priced well inside of a portfolio loan.
“It doesn’t necessarily change our direction and activities,” says Mike May, senior vice president at McLean, Va.-based Freddie Mac. “There might be some slight changes in pricing. If the portfolio had to be shrunk, there would be an extra premium to account for the fact that it’s a precious limited resource. But there’s less pressure to do that now.”
The increased portfolio flexibility does allow each company to have a solid Plan B should the market for their securitized loans suddenly dry up. “Having the portfolio there provides nice flexibility, so it’s nice to have another arrow in my quiver,” says Ken Bacon, executive vice president of Washington, D.C.-based Fannie Mae’s Housing and Community Development division. “Frankly we’re going to do what’s best given market conditions. I like having a strong MBS market, but if positions change, and the portfolio is the best thing to do, that’s what we’ll do.”
More than 80 percent of Fannie Mae’s business last year was through the MBS platform, a year in which the old portfolio caps loomed over the company. In fact, the MBS market had been dormant for years, and the portfolio reduction mandate was the main reason Fannie Mae revived the market.
But the company plans on similar numbers this year for its MBS platform, regardless of the new portfolio limits. “That’s a very strong number for an entire year, and I think we’ll continue to see that number being very strong,” says Heidi McKibben, Fannie Mae’s head of multifamily production.
Freddie Mac’s situation is a little different in that it began building its CME platform before the conservatorship. In that sense, CME was more of a reaction to all the business that Freddie Mac was losing to the conduit market. Still, the portfolio reduction mandate likely spurred the company to redouble its efforts on that front.
“The reason we went down the CME path was we wanted a better execution, to get better pricing and more proceeds for the borrower,” May says. “It just so happened that during the development, this portfolio cap got put in place. It’s an effective tool to help us manage the portfolio, so there’s no reason for us to stop.”