One government-sponsored enterprise's problem could be part of another GSE's solution.
That is the idea behind a deal announced Tuesday between Fannie Mae and the Federal Home Loan Bank of Chicago. Fannie, which has been given a mandate to put a bigger priority on supporting the housing market since it was put in conservatorship last month, agreed to buy 15- and 30-year mortgages from the Home Loan bank, which had to stop buying them from its members in July.
The Chicago bank created the Mortgage Partnership Finance program more than a decade ago to be competitor for Fannie and Freddie Mac in the secondary market. But without the ability to securitize mortgages, the participating Home Loan banks had to hold them on their balance sheets.
That left the Chicago bank, long the program's largest participant, saddled with credit risk as the housing market deteriorated.
Alex J. Pollock, a resident fellow at the American Enterprise Institute, who was the Chicago bank's president when the program was created, said his former employer and Fannie are "figuring out how to take advantage of each other's strengths."
The seizure of the credit markets has crimped the liquidity of small community banks, Mr. Pollock said.
"This will definitely help, because small banks are heavily committed to real estate credit. This is another outlet for their loans through the FHLB network and through another GSE."
James Lockhart, the director of the Federal Housing Finance Agency, the conservator for Fannie and Freddie, said in a press release that Fannie "may find it more efficient to manage one relationship — with the FHLBank of Chicago — than to work with a number of smaller, individual institutions."
He called the partnership "an excellent example" of the synergies created by merging the Office of Federal Housing Enterprise Oversight with the Federal Housing Finance Board.
Mr. Lockhart, who ran OFHEO, had no direct supervision of the 12 Home Loan banks until the FHFA was created in July.
Matthew Feldman, the Chicago bank's chief executive officer, said in another press release that the partnership with Fannie "facilitates access to the secondary market" and "will make it easier for the majority of our customers to continue to offer competitively priced fixed-rate mortgages."
Herb Allison, who was installed as Fannie's president and CEO last month, said in the same release, "Partnering with the Federal Home Loan Bank of Chicago helps us to fulfill our mission to provide the most support possible to the market, while prudently managing risk."
Fannie and Freddie have also canceled scheduled increases to their "adverse market" fees and stepped up loan modifications for troubled homeowners since they were taken over by the government.
Since July the Home Loan banks of Des Moines, Pittsburgh and Topeka, which participate in the Chicago bank's program, have been buying loans from its members.
Eric Hillenbrand, the managing partner and CEO of Hillenbrand Partners, a Chicago fixed-income fund management firm, said small banks' access to mortgage money has been "severely diminished" in the past few weeks.
"The driver was to provide liquidity to their members and their members' customers," he said.
"The FHLB is the only enterprise that did not have access to a secondary market. All the mortgages they buy could only reside on their balance sheets."
Mr. Hillenbrand is working on a similar program that would allow his firm to purchase and securitize mortgages from the Home Loan Bank of Atlanta, which covers nine states, including hard-hit Florida.
"Everybody's looking to find a solution to the current crisis, and this is just one piece of it," he said. "What they're doing is providing the mechanism for banks to get the financing."