SAN DIEGO - The chairman of the Federal National Mortgage Association expressed concern this week about the rapid growth of wholesale mortgage lending and its impact on credit quality.
Speaking at the convention of the Mortgage Bankers Association of America, James A. Johnson said the rate of serious delinquencies on loans originated by mortgage brokers is 150% higher than on other loans.
The Fannie Mae chief also said loans originated by correspondent lenders perform more poorly than those made through the retail channel. Even when there is a substantial down payment, Mr. Johnson said, delinquencies are greater on loans originated by someone other than the lender who sells them to Fannie Mae.
"I am concerned about the trend," he said. It results in poorer loans and ultimately "higher costs for homebuyers to compensate for the greater level of risk."
Credit quality was also on the mind of Mr. Johnson's counterpart at the Federal Home Loan Mortgage Corp., Leland Brendsel. In his speech, Mr. Brendsel addressed the megalenders' cautious stance on purchasing loans to low-income and moderate-income borrowers and defended Freddie Mac's use of credit scoring in the loan approval process.
He said Freddie Mac had found that credit scores are "highly predictive" for all borrowers, regardless of income or race.
Mr. Brendsel said mortgage credit standards have loosened as a result of both competition and the pressure to increase lending to borrowers who make less than the median income.
And he suggested there are limits to how much low-income lending the industry can do unless the economics change. He argued that the best incentive to make such loans will be profitability rather than regulatory pressure.
In a meeting with reporters, Mr. Brendsel denied that Freddie Mac has been asking lenders to buy back loans based on credit scores. Asked what could have led the lenders to think otherwise, Mr. Brendsel explained that Freddie Mac used credit scoring to determine what types of loans to oversample in its quality control process.
Mr. Johnson alluded to the buyback controversy and sought to distance Fannie Mae's newly announced use of credit scoring from Freddie Mac's.
"We won't go back and second-guess loans you have already made and ask you to buy them back if they don't match up to a new way of assessing risks and doing business," Fannie's chairman said.
Mr. Johnson also said his agency would not become a dumping ground for lenders' risky loans.
"The profile of the loans you deliver to us must be similar to the profile of all the conventional mortgages you are originating," he said. If it is not, Fannie Mae will have to believe that it has been "adversely selected."
"That is a practice that we will not accept, and a trend that the housing finance system cannot sustain," Mr. Johnson said.
Mr. Johnson's comments on wholesale loan quality could be seen as a warning flag to major lenders, but he said he did not yet know how the industry should solve this problem.
Wholesale lenders, which include industry leaders such as Countrywide, GE Capital, and Chemical Residential, acquire loans from mortgage brokers and smaller mortgage bankers.
More and more loans have been made through this channel, driven in part by the refinancing boom. In the past five years, such lending has gone from about one-third to one-half of originations.
At Fannie Mae such loans appear to have increased even more rapidly as a portion of all purchases. Mr. Johnson said that from 1992 to 1995, loans originated by third parties have increased more than a third.
