Some big lenders are unhappy about moves Freddie Mac took this year to make it easier for small mortgage companies to sell loans to the government-sponsored enterprise.
This is the GSEs taking another step toward dealing with brokers more directly, said Mike House, a lobbyist for FM Watch, a coalition of large banks that seeks to prevent Fannie Mae and Freddie Mac from expanding their business into the primary market for mortgage loans.
In May, Freddie Mac changed its eligibility rules to let mortgage companies sell it loans without keeping the servicing rights. Servicing loans is a prohibitively costly business to enter, and these costs keep some lenders from becoming serious players in the mortgage industry.
Freddie also cut by 75%, to $250,000 the minimum net worth a seller must have to sell it loans. Some big lenders interpreted this as meant to help small lenders or brokers bring it loans directly, industry observers said.
I believe a lot of the lenders would think its an indication that the GSEs are trying to establish direct business links with mortgage brokers for the purpose of facilitating dealing with them, said a former top executive at one of the nations biggest bank-owned mortgage companies.
And theres always the risk they could eventually circumvent the seller-servicer the lender that services its own loans said the former executive, who requested anonymity.
A Freddie Mac spokeswoman said that the moves are a boon to smaller mortgage companies. Such companies and the Mortgage Bankers Association (MBA) had lobbied for relaxing both eligibility requirements, she said.
Freddies net-worth requirement is now the same as Fannie Maes. Fannie has had a $250,000 minimum since the 1970s, according to Jeff Hayward, its vice president of single family business.
Mr. Hayward said that Fannie Mae does not exclude sellers that do not want to service the loans Fannie buys. It considers potential sellers case by case, he said.
As it has become more expensive for small originators to service loans, the distinction between traditional mortgage bankers and mortgage brokers has become blurred, Mr. Hayward said. Five years ago traditional mortgage bankers originated and serviced loans, but now they are selling off the rights on those loans to a consolidated group of big servicers, he said. There is no difference, Mr. Hayward said, between who were approving today and who we approved then. The difference is that we dont put labels on people, because we dont know what label to put on them.
Nonetheless, mortgage brokers have become an increasingly important source of originations during the past 13 years, making them an attractive source of loans if Fannie and Freddie were to buy directly from them.
Brokerage firms originated 20% of loans for one- to four-family homes in 1987, 52% in 1994, and 70% in 1998, in the midst of a refinancing boom, said Thomas LaMalfa, a managing director at Wholesale Access, a mortgage industry research firm in Columbia, Md. The figure dropped to about 50% last year, when the boom ended, he said.
Meanwhile, the number of brokerage firms in the United States has increased to 36,000 in 1998, from 7,000 in 1987. Of the $1.38 trillion of originations processed last year including subprime loans brokers accounted for $634 billion, Mr. LaMalfa said. Mortgage brokers are the single most important group of mortgage originators out there.
Critics would be hard-pressed to find Fannie or Freddie overtly making a case for buying loans direct from brokers. Brokers still have to funnel loans to Fannie and Freddie through lenders, said Bob OToole, MBA senior staff vice president. And despite recent pressure on them from brokers, Fannie and Freddie have not budged.
But critics say that Fannie and Freddie are merely biding their time before letting the brokers in. Some seller-servicers are afraid of losing their intermediary status between brokers and the GSEs, according to the former top mortgage executive.
The trouble started in the mid- to late-1990s, he said, when the GSEs made their automated underwriting systems available to brokers. Fannie made its Desktop Originator available to brokers with a lender sponsor. Freddie allowed brokers to use its Loan Prospector at first only through licensing agreements with lenders, but without such agreements and over the Internet since June 1999.
(The non-Internet Loan Prospector was hard to set up, cumbersome, and worked badly, a Freddie spokeswoman said. Also, the brokers could sell the loans only to the lenders that had given them the access. Under the new system, brokers can assign the loans to any Freddie Mac seller-servicer.)
By offering brokers access to automated underwriting systems, the former top executive said, the GSEs created a direct link with brokers, which could now get their loans approved by Fannie or Freddie.
And, he added, the significance of the move was not lost on the major seller-servicers, which were used to dealing exclusively with the GSEs. Ultimately, he said, this was a way for the GSEs to establish more direct links with the seller-servicers own broker clients.
Mr. Hayward denied that Fannie is courting direct business with brokers. Were not out to take large lenders customers away. Our objective is to continue to approve quality lenders that can help us fulfill our mission, he said.
Some brokers say that automated underwriting has made it much easier to get loans approved. Desktop Originator and Loan Prospector have helped me out a lot, said Margie Hofberg, a broker with Residential Mortgage Center Inc., in Rockville, Md. The automated systems have allowed me to do more loans with fewer people and put the company in control of the loans, she said.
But lenders saw the GSEs promotion of their automated underwriting systems as an attempt to get cozy with their clients. Fannie and Freddie set the ground for cutting out the seller-servicer as the middleman between originators and themselves, the former top executive said.
Some lenders said that automated underwriting has allowed brokers to shop loans among lenders, because once a lender approves a loan using Fannies Desktop Originator or Freddies Internet version of Loan Prospector, the broker is not committed to selling the loan to that lender.
With Desktop Originator, a broker can ask its lender sponsor to release the loan for sale to another company. And with Freddies Internet version of Loan Prospector, the broker can assign the loan to multiple lenders and is not obliged to sell it to any of them, Ms. Hofberg said.
Whats more, broker use of automated underwriting has made it cheaper for small originators to sell loans to Fannie. Fannie gives limited or relaxed representations and warranties on any loans that its automated underwriting programs accept. Representation and warranty requirements amount to a guarantee from a seller that it would buy back a bad loan from either of the GSEs.
A mortgage technology expert who requested anonymity said that with automated underwriting there is far less reliance on traditional underwriters, and more reliance on technology, to ensure high-quality origination.
The technology available today helps ensure higher loan quality production and reduces the chance of fraud, the expert said. Consequently, your need for having a mortgage company with very high standards or a high net worth becomes less significant. Fannie and Freddie can work with smaller and smaller mortgage companies.
The former top mortgage executive said that Fannie and Freddies automated underwriting systems might even let them eliminate their net-worth requirements.
Mr. Hayward said that while automated underwriting has allowed Fannie to buy more loans and to reach deeper into the mortgage markets, it has not necessarily made it easier to sign smaller companies to its roster of sellers. Fannie does not evaluate companies with its underwriting tools alone, he said; the strength of a companys back-office operations is also considered.
But whether or not net worth requirements drop further at Fannie and Freddie, the battle lines have already been drawn.
The landscape is continually changing, said the mortgage technology expert. Fannie and Freddie will continue to work with smaller companies.