Even as policymakers plot the demise of the government-sponsored enterprises, Fannie Mae is trying harder than ever to win business from small and midsize banks.
Over the past few months, Fannie has raised the prices it pays to community-based lenders for mortgage loans, enticing them to sell loans directly to Fannie, rather than to large-bank aggregators like Wells Fargo (WFC) and JPMorgan Chase (JPM).
The change in pricing is part of a broader effort by Fannie's regulator, the Federal Housing Finance Agency, to level the playing field between community-based lenders and large banks.
Historically, large banks have received volume discounts from Fannie and Freddie Mac. Small lenders, however, did not receive the discount and tended to sell their loans to whichever commercial bank that offered better pricing.
"There should not be a significant difference in how large and small lenders are treated when securitizing residential mortgage loans," Sandra Thompson, the FHFA's deputy director for the division of housing mission and goals told a Senate subcommittee last month. "It is critical to include community-based lenders as we take steps to prepare the foundation for a new housing finance system."
To be sure, Fannie and Freddie had been increasing their purchases home loans from small banks through their so-called cash window since they were taken over by the government in 2008. The exit of large banks like Bank of America (BAC) and MetLife from the correspondent lending channel reduced competition and opened the door for the GSEs to better compete for small lenders' business.
Last year, 2,200 banks, credit unions and mortgage bankers sold $286 billion in loans for cash to Fannie and Freddie, triple the volume in 2007. Not only has the total volume of loans delivered to the GSEs increased substantially but the number of community-based lenders has jumped 18% from 2007 to 2012.
"As some of the larger players in the market have gone away, there have been more and more small and midsize lenders that want a direct relationship with Fannie Mae," says Andrew Wilson, a Fannie spokesman. "They can sell the loans to us for cash and turn around and make more loans, Some banks want to do the mortgage-backed securities themselves, but many want to just sell the loans and go about their business making additional loans."
Fannie has been particularly aggressive lately in marketing itself to community lenders, issuing in July a commentary by Renee Schultz, its senior vice president of capital markets, and a five-page update on how it is providing liquidity to smaller lenders.
In June, Fannie invited community bankers in towns with populations as low as 11,000 to a conference where Schultz said they could "get pricing as good as that of large banks," says Todd Hopkins, president of CorTrust Mortgage, a unit of the $725 million-asset CorTrust Bank, in Sioux Falls, S.D., who attended the event.
It was the first of a larger outreach effort by the GSEs to engage lenders, especially in rural or underserved communities.
"The marketing is new which shows they are competing again in a way they never really had done in the past," says Dave Stephens, the chief operating officer and chief financial officer at UCM, a Denver firm that hedges mortgage servicing. "It's a sea change that's been happening in the past few months."
"Their pricing is aggressive," adds Donavon Ternes, chief operating officer and chief financial officer at $1.2 billion-asset Provident Financial Holdings (PROV) in Riverside, Calif. "They are winning more of our execution, which tells me they're pricing better in comparison to the aggregators."
There are other reasons why banks may want to sell directly to Fannie and not large banks.
"We don't want to give the large aggregators, who in many cases are our direct competition, a list of our customers to call on," says Hopkins, who called pricing more competitive now than in the past. "I think selling to Fannie and Freddie directly gives us a competitive advantage in the markets we serve."
Wells and JPMorgan Chase declined to comment.
Fannie's efforts to win over small banks comes at a time when Congress is debating how to unwind the GSEs and bring more private capital bank into the mortgage market. But since the reform efforts will be years in the making, there is no reason why the GSEs should not be capturing more profits for taxpayers, Stephens says.
"The profits are tremendous," he says. "I think the profit incentive is coming back to Fannie and Freddie after years when they were just losing money hand over fist."