A 19% annualized jump in Freddie Mac’s mortgage-related investment portfolio has raised red flags, but the general trend is still going in the right direction

Both Fannie Mae and Freddie Mac are gradually reducing their mortgage-related investment portfolios, so when Freddie Mac suddenly increased its portfolio by an annualized 19% last December it caught some people’s attention. So when Bloomberg’s Jody Shenn says that it sounds like a ‘high-flying hedge fund’ run by ‘Wall Street refugees,’ it sounds like a return to lax controls and risky deals from before the financial crisis. However, focusing on the long term trend instead of just one recent month tells a very different story.

Freddie Mac 's Investment Holdings

Freddie Mac continues to liquidate its investment portfolio (mostly)

For context, at the end of 2008 Freddie Mac’s mortgage-related investment portfolio had a balance of $805 billion. That balance fell by 6.1% in 2009 to $755 billion, and then by 7.7%, 6.3%, 14.7% and 17.3% in the years that followed bringing the portfolio down to $461 billion in 2013. During this time there have been months here and there when the net change was positive as Freddie Mac traded around its position, but the overall trend has been to steadily unwind the mortgage-related portfolio. In 2014 that trend continued with an 11.4% full-year drop ending at $408 billion, even after you take the December purchases into account, hardly an about-face.

Since former head of global fixed income at UBS Group Michael Hutchins took over Freddie Mac’s investments and capital markets division in July 2013 the portfolio has dropped from $521 billion to $408 billion. Again, while there have been some months where the portfolio either didn’t budge or even grew a bit, it’s clear that he’s in the process of drawing down the investments.

Shenn says that the portfolio balance ‘similarly rose during three other months over the past two years,’ but the actual annualized increases he’s talking about were 6.3%, 0.6%, and 0.1%. None of the other three hit double digits like last December, and only one was really substantive.

December looks like an outlier

“You need to make sure that the core mortgage securities, your issues, are traded well,” Layton told Shenn in an email. “Over time, our securities will trade at lower rates because we’re providing a bid at times. All of this is good for the market, good for the borrowers and good for the lenders.”

After all the missteps and mismanagement that we’ve seen from Fannie Mae and Freddie Mac, especially in the years immediately before the subprime bubble collapsed, you can understand why people are skeptical (that’s to say nothing of the GSE’s political opponents). But December looks like an outlier from an agency that’s gradually reducing the size of its investment portfolio as intended.