In Bid to Boost Business, Freddie Mac Makes Loan Prospector Free

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In what could be a sign of renewed competition between the government-sponsored enterprises, Freddie Mac will no longer charge mortgage lenders to use its Loan Prospector automated underwriting system beginning June 1.

Lenders currently pay $20 to submit a mortgage application to LP to receive an automated decision about whether the loan meets Freddie's requirements for purchase. The fee covers up to 15 resubmissions of the loan application to test alternative scenarios. While LP does not render the credit decision on a borrower's application, lenders commonly require a positive AUS finding to proceed with a mortgage application.

"It's an effort to help lenders get a handle on costs. That, in turn, should help promote liquidity in the market," Freddie Mac spokesperson Brad German said in an interview.

German added eliminating the AUS technology fee is a permanent change. "There is no plan to revisit it," he said. "This is the new normal for LP."

Free use of Loan Prospector will also extend to lenders that use the AUS to interface with the Federal Housing Administration's Technology Open to Approved Lenders, or TOTAL, Scorecard. The FHA technology works in conjunction with an AUS to evaluate borrower creditworthiness. In addition to Loan Prospector and Desktop Underwriter, Calyx Software and MeridianLink provide AUS interfaces to TOTAL.

Fannie Mae and Freddie Mac are the dominant purchasers of loans in the U.S. mortgage market, but Freddie has long been the smaller of the two GSEs. Competition between the two companies has largely been muted since they were placed into federal conservatorship in 2008, but late last year, Freddie CEO Donald Layton touted the firm's rising market share and outlined efforts to solicit new business from mid-size and small lenders.

"It's certainly in [Freddie's] interest if they want to continue to be able to stimulate volume," said Jeff Lebowitz, owner of mortgage technology market research and consulting firm MORTECH LLC. "It may or may not help lenders do more business. The real beneficiary for it is the agency. It's a form of quality control. I never liked the idea that they would charge for it."

Now, the decision to make Freddie's AUS free has some lenders wondering how Fannie Mae might respond in kind with its AUS, Desktop Underwriter.

"Will Fannie follow suit? That's something we are interested in understanding," George Henley, executive vice president of retail lending at Freedom Mortgage, said in an interview at the recent Mortgage Bankers Association Secondary Market Conference.

But a spokesperson quashed the idea of Fannie Mae eliminating its DU fees.

"Desktop Underwriter, Collateral Underwriter and EarlyCheck are valuable tools that give lenders greater certainty in the mortgages they make. While we continually assess our pricing model, DU's value to lenders is clear," Fannie Mae spokesperson Andrew Wilson said in an email.

Fannie charges $30 to use DU, but gives lenders a $5 discount if the loan is sold to Fannie, according to David Lykken, managing partner of the consulting firm Mortgage Banking Solutions. He said he couldn't comment on specific groups' policies, but said he's heard some industry partnerships offer discounts that have further reduced the price by at least another $5. The Mortgage Bankers Association recently announced a number of new member benefits that include unspecified discounts on DU fees.

The FHA does not charge lenders to use TOTAL Scorecard, but AUS vendors that provide an interface to it do typically charge a fee ranging from $15 to $30 per submission, said Lykken.

The GSEs' AUS technologies were instrumental in introducing statistical modeling to residential mortgage finance when they were first made commercially available in 1995. In 1996, only 25% of lenders were using AUS technology, but that rate soared to 90% by the end of 2000, according to MORTECH estimates. In addition, a 2010 MORTECH study estimated that Fannie and Freddie generate a combined $200 million to $250 million per year in AUS fees.

Freddie Mac's securitized mortgages trade at a discount to rival Fannie Mae's due to differences in their payment schedules. The Federal Housing Finance Agency has developed a long-term plan to address this discrepancy by directing the GSEs to establish a common securitization platform.

However, regulators are wary of the short-term implications of this plan on lenders, which face their own slew of rule changes and new compliance requirements, said Robert Fishman, senior associate director in the FHFA's office of strategic initiatives.

"That's one of the reasons we structured CSP and the single security to not touch the lenders. They have a lot going on," he said during an MBA Secondary panel.

The GSEs and FHFA are making progress on the common securitization platform, but there still is no definite timeline for it, Fishman said, adding it will take years to build.

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Mortgage technology Compliance systems GSEs Underwriting Secondary market Originations