How does the disclosure about Fannie Maes duration gap affect investors in mortgage-backed securities?
On September 16, 2002, Fannie Mae released its monthly summary of activity in its mortgage portfolio, including mortgage commitments, purchases and sales, portfolio growth rate, net interest margin, delinquencies and duration gap. The headline piece of data emanating from this release was that the company’s duration gap had widened to a negative 14 months on August 31, reflecting the recent sharp decline in mortgage rates. Fannie Mae’s duration gap measures the difference, in months, between the durations of the assets and the liabilities in its mortgage portfolio. The target for the duration gap, established by management, is to be within a band of plus or minus 6 months. On October 1, Fannie Mae rushed out to the market the news that its September duration gap had narrowed slightly to 10 months. Since then, Fannie Mae has reported that its duration gap has stayed within its target band.
