Fannie Mae and Freddie Mac, the twin pillars propping up the American housing market, are running hotter on interest-rate risk. For two institutions whose combined mortgage-backed securities and debt exposure exceeds $5 trillion, that’s not a rounding error.
The government-sponsored enterprises have been under federal conservatorship since the 2008 financial crisis. During that time, they’ve generally kept interest-rate risk in check through derivatives hedging and careful portfolio management.
What’s actually happening with the GSEs
Fannie Mae’s most recent quarterly report maintained that its derivatives hedging strategy kept interest-rate risk exposure “consistently low” despite volatile market conditions. With mortgage rates currently sitting around 6.30%, the GSEs are navigating a tricky environment where rate movements in either direction create asymmetric exposure.
If rates spike, their existing portfolio loses value. If rates drop, borrowers refinance and the GSEs lose their higher-yielding assets.
