Fannie Mae fees spark bond trades

By Al Yoon - Analysis

NEW YORK (Reuters) - Fannie Mae, the largest provider of U.S. home mortgage funds, is surprising lenders by maintaining fees on many new loans a month after rival Freddie Mac cut similar costs in its a nationwide refinancing effort.

The policy is opening trading opportunities in the $5 trillion mortgage-backed securities market as investors -- seeking to protect holdings in the biggest refinancing wave since 2003 -- bet fees will limit refinancings of mortgages in Fannie Mae bonds, relative to Freddie Mac issues.

These trades end a stalemate based on predictions that regulators would force Fannie Mae to drop fees as homeowners struggle through the worst housing market since the 1930s. Value in Fannie Mae MBS is on the rise, since refinancings can hurt returns when rates are low.

The disparity is puzzling since Fannie Mae and Freddie Mac have been key tools of U.S. policy to stabilize housing since they were seized by the government in September, even if that mean ignoring the interests of shareholders. For example, the companies have coordinated programs to stall foreclosures, which hurts profitability since bad loans are held longer.

"People thought there would be lot of pressure for Fannie to follow, because their regulator is the conservator of both, and has been involved in decisions of both," said Thomas Lawler, founder of Lawler Economic & Housing Consulting in Leesburg, Virginia, and a former Fannie Mae senior vice president in portfolio management.

"The Federal Housing Finance Agency decided to keep the pretense that they are a publicly-owned company," he added.

Traders just this week began favoring Fannie Mae MBS since its fees will likely keep refinancings on the underlying loans slower than on Freddie Mac pools, said Steve Kuhn, head of trading at Pine River Capital Management in New York. Freddie Mac MBS paying 6 percent interest are 3/32 cheaper than Fannie Mae's, compared with a 4/32 premium on April 1.

Prices on pools of loans backed by investor properties, which based on fees have the biggest hurdles to refinancing, recently jumped relative to other bonds.