Fannie's Portfolio Management Team Not Worried by Gap.(Federal National Mortgage Association)

Investors may have been spooked by the news that the "duration gap" between Fannie Mae's assets and liabilities widened out to 14 months this summer, but you wouldn't know it from talking to the company's senior executives.

Fannie Mae's chief financial officer, Tim Howard, has publicly defended the company's interest rate risk management at investment conferences. And Peter Niculescu, senior vice president for portfolio strategy, makes a persuasive case that the company's risk tolerance is very much in line with its business goals, even though the company has committed to shortening the gap (which fell to 10 months in September).

The crux of their argument is this: that while falling interest rates may crimp income if the company's debt liabilities exceed the duration of the mortgages in its portfolio, Fannie Mae also stands to benefit from a falling interest rate environment. The portfolio growth allowed by heavy loan origination volume may help to offset the duration gap.

In essence, Fannie Mae has made a strategic decision to take on some prepayment risk associated with its portfolio.

"We hedge about half of the optionality that we buy, but we don't hedge all of it," Mr. Niculescu said.

He told MSN that Fannie Mae's strategy involves balancing the rate risk against natural gains the company will make in a refinancing environment.

He also noted that since the recent high in mortgage rates experienced last March, the duration of mortgage loans has shortened sharply. According to a Lehman Brothers index, the duration of mortgages shortened from 42 months last March to 17 months at the end of August.