Fannie Mae's economic decision to call its securities is an efficient and uniform call decision based entirely on the level of interest rates. In addition, given the stated final maturity of a callable debt security, there is no extension risk with callable debt. For mortgage securities, investors must evaluate much more complicated and uncertain call decisions requiring prepayment forecasts, many of which differ substantially among investors even for mortgage loans of similar characteristics. These prepayment models usually include a host of economic as well as noneconomic factors and have historically differed substantially from actual prepayment experience. Therefore, many investors have found the predictable nature of the call decision along with the structural benefits and attractive spreads of Fannie Mae callable debt to be an appealing alternative to mortgage related securities.
Callable debt is a potentially attractive vehicle to enhance returns without taking on credit risk.
Investors who are seeking higher yields but are reluctant to take on added credit risk or who believe that the corporate credit spreads may widen due to deteriorating credit conditions or negative earnings announcements may instead purchase Fannie Mae callable debt. These investors view the embedded call option risk as less substantial than the credit risk associated with corporate debt. By analyzing its components, investors are able to assess the value of callable debt. Fannie Mae callable debt security as the example in the following discussion. Similar explanations and analogies can be made for other callable structures that Fannie Mae issues.