Fannie and Freddie Still Have Room to Grow.(Federal National Mortgage Association)(Federal Home Loan Mortgage Corp.)(Brief Article)

Mr. Gray, senior research analyst at Sanford C. Bernstein & Co., New York, spoke at an America's Community Bankers meeting in New York recently. This viewpoint is an excerpt of his remarks to the thrift and bank executives, in which he advised that the government sponsored enterprises are well positioned to keep growing their secondary market loan purchases.

This year (2001) we estimate that the number of homes sold in the U.S, new and existing combined, will approximate 6.6 million, at an average price of roughly $190,000, representing $1.2 trillion in residential real estate transaction volume.

At an average LTV of 77%, this will generate just under $900 billion in purchase originations. However, refinance activity is likely to run just over $1 trillion this year, bringing total U.S. originations to $1.9 trillion, a record level in dollar terms. Relative to the current size of the market, 2001 will rank just behind 1998, with originations approximating 37% of outstanding mortgage debt versus 38% in 1998.

The level of refi activity is particularly sensitive to changes in the level of mortgage rates currently. The weighted average rate on outstanding mortgage debt approximates 7.25%. Should the mortgage rate remain at the current 7% level, it might reduce originations by $300-$400 billion to $1.4-$1.5 trillion next year, versus our forecast, which assumes a 6.65% mortgage rate.

Alternatively, a mortgage rate of 6.45% would add $300-$400 billion, and yield $2.1-$2.2 trillion. So the outlook for originations is quite volatile, to put it mildly.

Let us turn now to the business prospects of some of the major factors in the mortgage market, beginning with Fannie Mae and Freddie Mac.

Fannie and Freddie are having their best year since 1992, with total volume growth - loans and MBS combined - of 17% this year, about two times the market's growth rate. Their total loans and MBS combined will grow by $400 billion, from $2.3 to $2.7 trillion. By comparison, the U.S. mortgage market will grow by 9% or $500 billion from $5.6 trillion to $6.1 trillion. Thus, they will absorb 80% of the growth in total U.S. mortgage debt this year.