Freddie Mac expects to gain market share, but the mortgage buyer's head of securitization says that's only part of the story of Freddie's recent alliances with Norwest Mortgage and Bank of America.
John Fisk, executive vice president for single-family securitization, estimated that Freddie's share of the secondary market for home loans would rise to 45% from about 42% as a result of the deals. But he said that the company had not set market share goals and its competitor, Fannie Mae, could well regain the lost share by cutting prices.
"We defend our traditional market share. This is about trying to improve our competitiveness in the broader market," Mr. Fisk told American Banker.
The landscape of the home loan industry changed in March when Freddie allied itself with Norwest Mortgage Inc., the Des Moines-based mortgage unit of Wells Fargo & Co. The deal lets Norwest use its own automated underwriting system to approve loans, rather than Freddie's Loan Prospector, in exchange for selling all the loans to Freddie Mac.
Bank of America's mortgage unit will sell the bulk of its new mortgages to Freddie Mac. It will use its own automated underwriting system for loans originated in its retail branches and will use Freddie's system for loans it buys from brokers and correspondents.
These two agreements are "an opportunity to create value together and strengthen the effectiveness of both organizations," Mr. Fisk said.
"In thinking about who we want to do an alliance with, we focus on organizations that understand the value of a broad relationship," he said. The industry is focusing inordinately on what it perceives as a "market- share grab" by Freddie Mac, he added.
Freddie and Fannie compete for share of newly originated mortgages, and Fannie has held a 57% to 43% edge for much of the past 10 years.
But in a research note issued after the Bank of America deal was made public, Jonathan E. Gray, an analyst at Sanford C. Bernstein & Co., wrote that "parity" between Fannie Mae and Freddie Mac is in sight.
Lehman Brothers analyst Bruce Harting said Freddie Mac's share in April was already 45%-the upper end of its usual range.
Mr. Harting said Freddie's deals may reflect an effort to accommodate larger customers that are sensitive to the power of brokers and concerned about technology issues surrounding automated underwriting. Both Norwest and Bank of America are top-10 originators and wholesale lenders.
But "there are not enough dominant players on the seller-servicer side to cause a lasting shift" in market share, Mr. Harting said. The technology partnerships are "commodity-like" and easy for Fannie Mae to duplicate.
"A key element of the alliance is around the use of automated underwriting systems," Mr. Fisk said. "That is an issue around cost overlap and an issue around control over the consumer." Though Mr. Fisk declined to discuss other factors fueling the alliances, he said processes and technology were significant points of discussion.
Freddie is seeking to eliminate cost duplications, he added. "We believe that there are complementary strengths between us and our alliance partners. They have great brand names, they have access to the ultimate consumer."
Freddie Mac brings risk management capabilities, capital market expertise, and marketplace experience, he said. "We view ourselves as a wholesale financial institution. And we think that complements the brand and the distribution channels of our partners."
Though Freddie expects to see a temporary uptick in its market share, Mr. Fisk said that if Freddie's market share returns to 42% "it will be because of price activities on the part of our competitor." Some analysts have cautioned that the effort to attract alliance partners could prompt a price war between Fannie and Freddie over the guarantee fees that the government-sponsored enterprises charge lenders.
A spokeswoman for Fannie Mae said the bid for partners is "not a pricing issue." Fannie is "still adding the same value we were before," she said. "Lenders continue to work with us-we've always had the lead in the market share." Freddie's alliances will not improve its market share, she added.
Mr. Fisk cautioned that alliances would not be "the world order going forward." Such partnerships are not suitable for everybody, he said, and Freddie Mac continues to have business arrangements with small and midsize lenders.
Nevertheless, Mr. Fisk said, Freddie Mac is talking with some larger lenders. It has set "no specific time line" for completing other partnerships, he said.
