Fannie's portfolio dips, but duration gap widens

Fannie Mae's retained portfolio inched down in May ending a long run of multiple months in which it steadily rose, according to its latest report.

Fannie's total retained portfolio dropped from $174.84 billion in April to $172.18 billion. Freddie's fell from $141.81 to $132.22 billion. Both reprised an ongoing trend of elevation compared to a year ago, when Fannie's total was only $84.62 billion and Freddie's was $93.86 billion. 

Meanwhile, Freddie Mac's duration gap, a rate sensitivity measure, widened from 12 months in April to 14 in May. Fannie's increased 1.16 years to 1.29 during the same period.

The broadening duration gaps, which experts called historically wide in a recent Bloomberg article, may have been one of many complex considerations in May as the federal officials have used the GSEs' portfolios as rate policy tools.

To manage duration gaps, Fannie Mae and Freddie Mac can hold more shorter-dated assets or hedge. But some say the former can be less stable than longer-term equivalents and the latter may undermine efforts to lower rates.

Although the duration gap widened further, the pause in portfolio growth might have prevented it from expanding even more. Also, other factors like a change in the mix of long- and short-dated assets or additional hedging might have come into play.

A focus on rates persists

President Donald Trump and other officials within his administration, including Fannie and Freddie's oversight chief Bill Pulte, have put a lot of emphasis on lowering rates in housing and broader economic policy. So it's possible portfolio expansion has resumed or will soon.

"Lower the interest rates, you can have all of the housing you want," President Trump reportedly said during a recent press conference about his decision to not sign a shelter-related bill. 

While Freddie's average primary rate for mortgages rose from 6.3% to 6.53% in May, it more recently plateaued in June at levels around 6.49%.

Although inflation has driven home loan rates higher at times this year they are lower than they would have been without intervention. 

There is a $200 billion limit to the GSEs' rate-related bond buying for the portfolios, although policymakers have not been fully transparent in disclosing how this is being managed or will end, in part because it may depend on market conditions.