Flat Yield Curve May Augur Opportunity for GSEs

Freddie Mac sees a flat yield curve as a great opportunity to expand its mortgage-backed securitization business and invest in fixed-rate mortgages for its portfolio.

A flattening of the yield curve "plays to our traditional strength," Freddie's president and chief operating officer Eugene McQuade told an investor conference sponsored by Citigroup.

The mortgage giant is forecasting that higher short-term interest rates and a flat yield curve will produce a decline in adjustable-rate mortgage originations and more fixed-rate product in 2006 and 2007.

Mr. McQuade noted that the Federal Reserve's tightening will also make it less profitable for banks to invest in fixed-rate mortgages.

"While we have yet to see a sell-off of fixed-rate mortgages from bank portfolios, even slightly reduced investment by banks should create better fixed-rate buying opportunities for us in 2006," Mr. McQuade said last week.

Freddie increased the size of its mortgage investment portfolio by 8.7% in 2005 to $710 billion, mostly by buying subprime mortgage securitizations. These private-label securities are AAA-rated and contain mostly adjustable-rate mortgages.

"We generated most our portfolio growth last year in that sector," Mr. McQuade said. "This investment should contribute to continued growth this year."

In 2005, the government-sponsored enterprise increased the size of its mortgage portfolio by $63.1 billion while purchasing $65.1 billion in private-label securities.

The Freddie COO also told investors that Freddie gained market share from Fannie Mae in 2005 when it comes to the issuance of guaranteed mortgage-backed securities. Freddie's share increased from 41% in 2004 to 45% in 2005.

"We have been quite successful in the past two years in regaining share in the GSE market," Mr. McQuade said.

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