WASHINGTON - Aida Alvarez, the regulator for Fannie Mae and Freddie Mac, this week joined the discussion over the differences between the two agencies' automated underwriting systems.
Speaking to a meeting of the Associated Credit Bureaus on Monday, the director of the Office of Federal Housing Enterprise Oversight said her agency had "no particular opinion" on the business merits of the two systems.
But, she added, her agency - which oversees the fiscal soundness of the government-sponsored enterprises - will monitor loans approved by each system.
"If measurable differences in performance become apparent, we will make allowance for the difference in risk in our stress test," Ms. Alvarez said.
Translation: If one agency's underwriting system approves measurably riskier loans than the other's, the oversight body will ask for higher capital.
Ms. Alvarez told the credit bureaus that the different approaches Fannie and Freddie have taken to automated underwriting belie their image as "Tweedledum and Tweedledee ... virtually identical companies (that were) created by the government for the same purpose, with the same privileges, and competing in the marketplace for the same product."
Freddie Mac's system uses credit scoring to determine the creditworthiness of a borrower. Under this approach, Ms. Alvarez explained, statistical models use data from the loan application and credit report to arrive at a score that rates the risk of the loan in relation to other loans.
Fannie Mae has taken a different tack. Its system automates its current underwriting guidelines.
Ms. Alvarez briefed the credit bureaus on the stress test being developed by her agency. The test will be used to set risk-based capital levels for Fannie Mae and Freddie Mac - formally the Federal National Mortgage Association and Federal Home Loan Mortgage Corp.
Capital levels will be affected by a range of factors, including home prices, individual mortgage products, and loan-to-value ratios.
"If home prices decline for several quarters, other things being equal, the stress test will require the enterprises to hold more capital, since the amount of borrower equity is a key determinant of default risk," Ms. Alvarez said.
"Conversely, if home prices rise for an extended period, the test allows the enterprises to hold less capital," she said.
Ms. Alvarez's agency will describe these and other matters in its second annual report to Congress on Thursday.
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A postscript to last week's Mother of All Deals, the $6.4 billion securitization for Home Savings of America:
You may recall Freddie Mac beat out Fannie Mae to securitize the huge portfolio of adjustable-rate loans for the Irwindale, Calif., thrift, a unit of H.F. Ahmanson & Co.
Each agency has hotly pursued such deals, seeing an opportunity to recoup a share of last year's booming adjustable-rate originations. Did Freddie prevail in a slugging match?
Not really. It turns out that Fannie Mae didn't aggressively pursue this particular deal, the biggest of its kind. Timothy Howard, Fannie Mae's chief financial officer, told reporters last week that his agency just didn't know how large the deal would be.
