Fannie Mae's Risky Business
We've caught heck from the sages of Wall Street for suggesting over the past year that Fannie Mae was exposed to too much interest-rate risk. Well, all of a sudden a lot of investors seem to agree with us.</br></br>They've been selling off the nation's largest mortgage buyer after Fannie disclosed last week that what it once called its "superior" risk management is coming undone. Fannie shares closed off nearly 3% on Friday, to $64.60, despite a rising overall market and the continuing housing boom, and are now trading at levels not seen in two years. Louisiana's Richard Baker, Congress's leading Fannie overseer, is concerned enough that he's now asked the company's regulator to deliver weekly reports on the mortgage giant's status.</br></br>Specifically, Fannie reported last week that its duration gap -- a measure of how successful its interest-rate risk is hedged -- has been widening beyond its target range of plus-or-minus six months. In July, Fannie's duration gap was a negative nine months; in August it careened to 14 months, the largest ever reported. (A negative number reflects falling interest rates, a positive number reflects rising ones.)</br></br>So what happened?</br></br>The problem is clear: Falling interest rates have encouraged a record number of home refinancings and therefore of mortgage prepayments. In other words, Fannie's assets are being paid off faster than expected by homeowners.