Fed MBS Purchases Could Accelerate GSE Portfolio Wind Down

The Federal Reserve’s decision to purchase $40 billion in agency MBS a month could hasten the wind down of Fannie Mae and Freddie Mae’s giant mortgage portfolios, according to analysts at Bank of America Merrill Lynch.

“The implication here is that the GSEs could far more aggressively wind down their portfolios over the next couple of years and find a willing buyer in the Fed,” the analysts write in their “Securitization Weekly” report.

The GSEs are already under a directive from their regulator to reduce their investment portfolios by 15% each year.

The Fed’s decision will enable the GSEs to achieve their regulator’s “stated goal of maximizing returns for taxpayers,” while shrinking the portfolios. “Whether this is an intended or unintended consequence of the Fed’s policy is not clear,” the analysts admit.

The Federal Reserve intends to concentrate its buying on newly issued agency MBS in the to-be-announced market although it may purchase existing Fannie, Freddie and Ginnie Mae MBS “if market conditions warrant,” according to a FOMC statement.

Fannie holds nearly $200 billion of its own MBS in its $667 billion investment portfolio. Freddie controls $189 billion of its own MBS in its $576.3 billion portfolio.