Yes, higher rates hurt the mortgage market. But there are 2 offsets for FNM.
First, it helps their derivatives position, which FNM uses to hedge against higher rates. These derivatives losses get smaller and may even go away. OFHEO is trying to get FNM to recognize these losses, which would reduce their book capital, and force them to raise additional capital. But if rates rise, this may not be necessary. In fact, one of FNM's options to raise capital relative to their portfolio is to deliberately not grow. If rates rise, that may actually provide FNM some latitude to grow their portfolio at a faster rate than would otherwise be possible.
The second offset is that many of FNM's competitors have taken advantage of the "carry trade", and are therefore more exposed to rising rates than FNM. If rates go up, these competitors will suddenly find themselves having to refinance their shorter-term funding sources at mugh higher cost, and the mortgage market will become much less competitive from FNM's point of view.
