Everyone Knows Fannie, Freddie-Or Do They?
The high-pitched lobbying contest over reform of the massive secondary mortgage market has apparently drawn little attention among credit unions.
Few attendees to last week's National Association of Community CUs' annual meeting in Williamsburg, Va., were familiar with the proposals to reform the oversight over Fannie Mae, Freddie Mac, and now, the Federal Home Loan Bank System, despite the acute ramifications for the growing credit union mortgage business.
One credit union executive who has been very active in Washington politics and is normally well-informed admitted to having little knowledge of what is being proposed for the reform package. "To be honest, I haven't been following it that closely," he said. Yet this executive, whose credit union is expanding its business with Fannie Mae, as well as using low-cost funding from the FHLB to help finance its mortgage lending, had one thought on any reform proposals; "I hope whatever they do it doesn't impinge on their ability to offer innovative and successful services to our members."
But the expanding legislative battle has significant ramifications for credit unions, which have waded into the mortgage market to such an extent that real estate loans now account for more than half of credit union loan portfolios.
These arcane government-created entities, known as Fannie and Freddie, not only buy as much as half of all the conforming single-family mortgage loans made by credit unions, they also provide as much as half the investments credit unions hold, either through debt they issue, or mortgage-backed securities they create from loans made by credit unions and others.
They also facilitate the mortgage programs for many credit unions by holding their hands and providing key resources, like desktop underwriting that determines whether a loan will be approved.
The FHLBs, 12 regional banks originally chartered to help fund the savings and loan industry, have also grown into an important credit union resource. More than 700 credit unions now tap one or more of the banks for low-cost funding to either make more mortgages-one executive said his credit union borrowed money from the FHLB at 3% and lent it out for mortgages at around 6%-or to arbitrage in the investment markets.
And traditionally the mandatory stock issued the banks to their stockholders has provided credit unions with a healthy dividend. More recently, several credit unions have waded into the FHLBs' Mortgage Partnership Finance program, which provide a secondary market alternative to Fannie, Freddie or private institutions.
This legislative battle, which is pitting some of the most powerful lobbies against each other, has the potential to have a deep and meaningful impact on credit unions, even though it doesn't have "credit unions" written on it.