Home Federal Savings & Loan of Nebraska has been selling loans to Freddie Mac for nearly 25 years and wants to continue doing so but the government-sponsored enterprise is suddenly making it harder for the thrift to maintain the relationship.
Freddie has been telling its bank customers that, starting in January, it will charge them an annual fee if they do not sell it a minimum amount of loans each year. Meeting Freddie's targets could be a particular challenge for banks in rural areas, where demand is far lower than it is in more densely populated markets.
"Does Freddie really want to discourage smaller community banks from doing business with them?" asked Rich McGinnis, the president and chief executive at the $54 million-asset Home Federal. "Community banks are working extremely hard to watch every penny or nickel and to have to start paying a fee without getting any other benefit just doesn't make sense."
Located in Lexington, about 200 miles west of Omaha, Home Federal originated $4.6 million in residential loans last year, just shy of the $5 million threshold lenders must meet this year to avoid paying a $7,500 "low activity" fee for selling loans to Freddie Mac. Home Federal also could have avoided the fee if it serviced at least $25 million of loans for Freddie, but with just $18 million in servicing, it does not meet the new requirements.
When Freddie announced the fee in a bulletin in mid-May, the government-sponsored enterprise said the fees would support risk management efforts and offset the costs of monitoring mortgage servicers' compliance with its eligibility requirements. A Freddie spokesman said it was unclear how many active sellers would be have to pay the fee or if any would simply stop selling to Freddie altogether and instead sell loans to Fannie Mae.
Fannie's inactivity fee is much lower, at $1,000 a year, and mortgage lenders can avoid paying that fee by meeting one of three requirements: delivering $2 million in mortgage loans in a given year, servicing a $25 million portfolio of Fannie loans or paying a minimum of $5,000 in desktop underwriting fees.
Robert Davis, an executive vice president at the American Bankers Association, said his trade group is concerned about community banks' ability to do business with Freddie in a cost-effective way.
"Suddenly this changes the business model for some community banks," Davis says.
Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers of America, estimates that about one-quarter of bank members that currently participate in an ICBA program selling loans to Freddie would be affected. Many small banks only sell mortgage loans to Freddie Mac and have done so for years.
"To say that we're outraged is an understatement," Haynie says. "We're very upset about this because if you have a small servicing portfolio, you're between a rock and a hard place."
Of course, banks could avoid the low activity fee by selling either to Fannie of the Federal Home Loan banks' Mortgage Partnership Finance Program. McGinnis says that although he's signed up for the Home Loan bank program, he hasn't used it because "we're loyal to Freddie."
"We've had a very long and satisfactory relationship with Freddie Mac, even during the economic crisis," he says. "It would be tough to start over again."
Smaller banks are in a much worse position compared to their large competitors, Haynie says, because not only are they subject to this low activity fee, but a new framework introduced by both Fannie and Freddie last year means all their loans now are targeted for a quality control review while large sellers only have a sample of their loans reviewed.
"These are burdens placed on very small organizations," Haynie says. "We know there's a cost to maintain sellers but it's not $7,500."
Rose Oswald Poels, the president and CEO of the Wisconsin Bankers Association, says if bankers decide not to sell to Freddie at all, they likely will not offer the same loan terms to consumers.
"If they're taking away the Freddie option for smaller institutions, and if bankers are left having to portfolio a loan, it's not going to be a 30-year fixed rate loan," she says. "Allowing the consumer to have access to the secondary market through a community bank is critical."
McGinnis at Home Federal says he has considered purchasing a servicing portfolio from another lender just to boost his thrift's volume and avoid the inactivity fee. The problem with that route, he says, is "I'd be taking on a lot of new risk that we don't need. So other than trying to encourage Freddie to reassess their decision, we're not certain what to do right now."