Countrywide Credit Industries has struck a deal with Fannie Mae that analysts say could fundamentally alter the economics of the mortgage industry.
Executives at the Calabasas, Calif., mortgage lender announced the arrangement, which would rejigger the way Fannie pays Countrywide to service its loans, in an earnings teleconference with analysts Tuesday.
"This is huge for Countrywide," said Michael McMahon, an analyst at Sandler O'Neill & Partners.
The deal will put the company-the last major independent mortgage lender-on "an equal playing field" with its bank-owned competitors, Mr. McMahon said.
Under the present structure, when Countrywide makes a 7.5% loan, it puts the loan into a pool backing a Fannie Mae security that pays holders a 7% coupon. Every year, Countrywide collects a fee of 25 basis points to service the loan, and Fannie gets 25 basis points to guarantee the security.
Under the new arrangement, Countrywide would put that same 7.5% loan into a 7.25% Fannie security. Fannie would still collect the 25-point guarantee fee. But the prevailing market rate for mortgage-backed bonds would still be 7%, so investors would pay Countrywide a premium.
Based on current market prices for Fannie pass-throughs, that premium would amount to about 1.2% of face value, or $1,200 for a $100,000 loan.
That's 4.8 times the servicing fee-the same multiple at which Countrywide capitalizes its servicing asset today. The key difference: In the new scheme, Countrywide gets its servicing fee as cash up-front rather than having to collect it over the life of the loan.
Countrywide executives told analysts on the call that it would use this structure in 30% to 40% of its conventional-loan securitizations in its second fiscal quarter, which begins June 1.
"I've got to believe this is the wave of the future," said Gary Gordon, an analyst at PaineWebber Inc. "The major servicers will all do this."
Countrywide has long been at a competitive disadvantage to its bank- owned counterparts, Mr. McMahon said, because the rating agencies permit the banks to finance their servicing assets with more debt relative to equity.
Because Countrywide's mortgage servicing asset will decline over time, the company will need to set aside less equity capital to finance that asset. The company will be able to redeploy that capital in other, higher- yielding businesses.
The new servicing structure "makes it easier and less capital-intensive for us to grow," said a Countrywide spokesman.
"We still have the same earnings, but it's more cash-flow positive," the spokesman added.
But the transaction may create some risks for Fannie, said Jonathan E. Gray, an analyst at Sanford C. Bernstein & Co.
In the unlikely event that something were to happen to Countrywide, Fannie would want to transfer the servicing on those loans to another company. "If there's no recurring income (for the servicer), that increases business risk," Mr. Gray said.
Mr. Gray said that Fannie would need to get "some kind of collateral" to protect itself against such an event.
Countrywide's spokesman would not comment on whether his company would post any kind of collateral to Fannie Mae, but said Fannie "recognizes that Countrywide is not going to go anywhere.
"The overall economics of this structure are such that it's desirable to us," he added.
Fannie Mae has offered the "alternative servicing compensation" plan to lenders for three years, said Lynda Horvath, senior vice president of capital markets at Fannie Mae.
"To date it hasn't been used that much," Ms. Horvath said. "Clearly this is the first large execution that we've had."
But given the benefits to servicers of getting cash up-front, she said, "My guess is, this is something we'll see more of."
Separately, analysts said Countrywide told them on the conference call that it was negotiating with both Fannie and Freddie Mac to work out an exclusive arrangement in which it would promise all or most of its production to one of the two secondary marketing giants.
The two largest lenders-Bank of America and Wells Fargo & Co.'s Norwest Mortgage unit-have inked exclusive deals with Freddie; Fannie has struck similar pacts with at least four lenders, including the mortgage units of Fleet Financial Group and Dime Savings Bank.
