WASHINGTON An outspoken critic of Fannie Mae and Freddie Macs expansion into the subprime market now says he is willing to become a guarded partner to Freddie.
William D. Dallas, founder and chief executive of San Jose, Calif.-based First Franklin Financial Corp., said this week that he would be open to trading loan-level information on mortgages Franklin has originated in exchange for a credit wrap from Freddie on upcoming securitizations of those mortgages.
In the arrangement, he said in an interview at the Mortgage Bankers Associations subprime conference, Freddie would receive access to data on the performance of the loans underlying the securitizations data that Freddie needs to plunge deeper into subprime waters. Mr. Dallas said such arrangements are a good strategy for subprime lenders.
A spokeswoman for Freddie said that because the company has been making these types of deals for more than three years, it can study the market before moving in full speed. Freddie Mac now works with 26 subprime lenders, she said.
It gives us access to the loans so that we can study their performance, the spokeswoman said. Its our way of beginning to explore how we can move deeper down the credit-risk spectrum.
She said Freddie buys the loans in pools and that they are then credit enhanced to protect the company from risk. Another Freddie official at the subprime conference would not discuss talks with First Franklin or any specific subprime lenders.
Mr. Dallas change in tune may come as a surprise to some; in recent months, Mr. Dallas has openly criticized Fannie and Freddie. Their entry into the subprime market, he and others have argued, is depressing margins and reeks of unfair competition.
But the chance to obtain a better execution on his future securitizations appears to have won Mr. Dallas over. If you come in and enhance my securitization so I get a better price, youre my partner, he said. For over a year, under highly publicized programs, both Fannie Mae and Freddie Mac have been buying the loans of borrowers with slightly impaired credit. These loans are at the top end of the subprime spectrum, Fannie and Freddie have argued, and should be considered conventional. But lenders and brokers say the GSEs are actually buying riskier loans those with Fair, Isaac & Co. credit scores of between 585 and 620. Many observers say these scores put them in the B credit range, a lower tier of subprime loans. Freddie Mac has recently expressed interest in wrapping, or providing a credit guarantee, Mr. Dallas said, on the riskier B segment of First Franklins mortgage securitizations.
The Freddie spokeswoman said the subprime lenders Freddie works with get better execution and pricing on their securitizations, and that Freddies work will help create a secondary market in the lower-credit areas. Ultimately we hope there will be a more streamlined process and more efficiency, she said.
Mr. Dallas said that though he is willing to be partners with Freddie, he is sticking to his guns on the broader issue of so-called charter creep, a phrase sometimes used to describe the GSEs move into conventional financial services businesses such as mortgage insurance.
He said he still plans to publicly oppose the GSEs originating loans and what some see as their courting of mortgage brokers.
I dont sell them loans; I give them guarded information, and I learn from them, Mr. Dallas said. What I wont let them do is originate loans or offer a mandatory product to my mortgage brokers through their automated underwriting system.