Mudd Defends Portfolio Role

Fannie Mae CEO Daniel Mudd strongly defended the company's retained portfolio business in a conference call last week, saying that interest rate risk is low and the portfolio helps stabilize the U.S. mortgage market.

He said Fannie Mae's duration gap, a key measure of interest rate risk exposure in the portfolio, was currently at zero months. He said the duration gap has remained in the range of plus or minus one month so far during his tenure at the mortgage secondary market giant. "I don't expect duration to remain this low forever," he added during a conference call hosted by UBS.

Mr. Mudd said Fannie Mae's work to keep interest rate risk low "is not an accident," adding that both the company's board and its regulator constantly monitor its risk exposure.

Mr. Mudd said that Fannie Mae offsets "50% to 80% of the acquired optionality" in its mortgage portfolio upfront, largely by issuing callable debt.

He said Fannie Mae's portfolio business helps add stability and liquidity to the housing finance system, since it allows Fannie Mae to step into the market and purchase mortgages when demand from other investors slows down.

"I'm pleased that our fixed-income securities remain strong. Both U.S. and foreign investors continue to invest their funds in the U.S. housing market," he said. "It's knowing that the capital is there in bad times as well as good times that gives the U.S. mortgage market its stability." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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