Fannie and Freddie Foes No Longer

Fannie Mae and Freddie Mac, once fierce rivals for mortgage lenders' business, have been forced into a kinship of sorts under federal conservatorship.

Eighteen months after the government seized them, the secondary-market giants no longer focus on gaining market share or cultivating partnerships with originators. Their main priorities today are preventing foreclosures and saving taxpayers money. To help do the latter, the government-sponsored enterprises have been forcing lenders to buy back greater numbers of defective loans, a trend that has ruptured relationships. With the Federal Housing Finance Agency coordinating policies and initiatives, Fannie and Freddie often appear to be working in tandem. It is a far cry from the days when Fannie and Freddie fought for volume by offering price breaks to the top lenders. "Definitely the competitiveness is out of the relationship," said Brad Nease, the president of Mortgage Capital Management Inc., a San Diego secondary-market consulting firm.

"With both of them out of capital and supported by the government, they really have blended into the same entity," he said.

This month American Banker interviewed more than two dozen mortgage bankers, former GSE executives and other industry members, most of whom did not want to be identified. They painted a picture of radical change in the corporate cultures at Fannie and Freddie, and resulting frustration at their lender partners, who complained that the GSEs have become too risk-averse and bureaucratic.

There is not much lenders can do besides grumble if they want an outlet for their loans. Fannie and Freddie financed or guaranteed 78% of new, single-family mortgage production in the first nine months of last year, up from 54% for all of 2006, according to the FHFA.

Fannie and Freddie would not comment for this story and referred questions to the FHFA, their regulator and conservator.

Stefanie Mullin, an FHFA spokeswoman, said that, though each company operates independently, they are working toward a common goal.

"Credit-loss mitigation is an essential goal of the conservatorships, and in that area, the two companies have worked together with FHFA and the administration to develop and implement the Making Home Affordable Program," she said.

Underscoring the new nature of Fannie and Freddie, Edward DeMarco, the FHFA's acting director, said in a letter to lawmakers this month that he had barred the GSEs from developing new products.

Neither Fannie nor Freddie had even asked for the agency's permission to pursue product development since at least July 2009, when a public review process was established.

The GSEs, DeMarco wrote, should "concentrate on their existing core businesses, including minimizing credit losses." To that end, tighter guidelines have made it more difficult to sell loans to the GSEs.

"An adverse consequence of conservatorship under Fannie and Freddie is that if the loan is not perfect, they won't buy it," said a banker who sells loans to both GSEs and compared them to the Post Office. "They're essentially saying, 'don't sell to us.' So the effect is ... that lenders will not originate anything other than loans whose borrowers have a high credit score and a big down payment."

Perhaps the biggest headache for mortgage lenders doing business with the GSEs now is the surge of loan-buyback requests that began in earnest in 2008.

In its third-quarter report, Freddie said that servicers had repurchased $960 million of loans from it during the period, nearly double the amount a year earlier. Fannie does not disclose its volume of repurchase requests but said in its third-quarter report that repurchases were expected to remain high into 2010.

Loans that were originated four or five years ago and performed well until the borrowers lost their jobs are being sent back to originators, lenders complain. An army of contractors and outsourced third-party firms working for Fannie and Freddie are auditing loan files, looking for reasons such as an inaccurate debt-to-income ratio or an investment property that the loan applicant claimed was to be a second home to push a file back to a lender.

"The old rules in which they had relationships with lenders is gone," said another lender. "The buyback issue is totally selective. It's good for them and bad for lenders."

As instruments of the Obama administration's housing policies, the GSEs move in lockstep more often than before they entered conservatorship. For example, on Dec. 17 Fannie and Freddie made nearly identical announcements that they would suspend evictions of tenants living in foreclosed properties.

When the administration introduced the Making Home Affordable Program in March, Fannie was named its primary administrator, collecting monthly loan-level data from servicers. Freddie was appointed the compliance agent, overseeing how loan modifications were being executed by servicers and ensuring the development of quality assurance programs.

However, the morning of Feb. 10 brought a flashback to the days when the GSEs would sometimes upstage each other. This is when Freddie announced a plan to buy back from its securitized pools all the loans that were 120 days or more past due.

It was big news for the mortgage-backed securities market. Investors had been wondering whether and when the GSEs would undertake such buybacks, which accelerate prepayment of bondholders' principal.

For much of the day, analysts were still wondering what Fannie would do. "Freddie beat them to the punch," Walt Schmidt, senior vice president and manager of structured product strategies at First Horizon National Corp.'s FTN Financial Capital Markets in Chicago, said around midday.

Finally, Fannie announced a similar buyback plan in a press release that appeared to have been hastily put together, with several typos. (The buyouts will save the GSEs money since they will no longer have to advance mortgage payments to security holders.)

Two Washington sources later said Freddie had by accident sent out its release prematurely that morning, forcing Fannie to scramble. Michael Cosgrove, a Freddie spokesman, denied that the announcement had been sent by mistake. f there was a glitch at Freddie, it would have been the exception that proves the rule: Fannie and Freddie do not do anything big without FHFA's say-so.

But David Lykken, the president of the Austin consulting firm Mortgage Banking Solutions, offered a different interpretation. The incident shows that, in one sense, "the rivalry is as alive as ever," he said.

Policymakers have discussed a range of outcomes for the GSEs, many of which such as turning them into public utilities would keep the companies separate.

But in Lykken's view, "only one of the two entities is going to survive." The GSE left standing "will be the one who can manage risk most effectively," he said.

Hence, though under conservatorship "they're absolutely less competitive, without question," Fannie and Freddie still have a reason to try to differentiate themselves from each other, Lykken said.

"This is a game of chess right now, and it's all about survivability," he said. Kate Berry is a reporter for American Banker.