Freddie Mac is taking a look at packaging its own mortgage securities, and Wall Street is up in arms.

According to a report prepared for Freddie Mac and obtained by American Banker, the mortgage agency is examining ways to create its own real estate mortgage investment conduits - complex securities that combine individual mortgage issues in a single package.

By packaging Remics on its own, Freddie hopes to make the mortgage securities market more efficient, which could possibly bring down mortgage rates.

If the government-sponsored enterprise proceeds, it would cut Wall Street houses out of lucrative packaging fees that have been a steady source of investment banking earnings for more than a decade.

For every $1 billion of loans they package into Remics, investment banks reap about $450,000 in revenues, according to the consultant who authored the report for Freddie Mac - formally the Federal Home Loan Mortgage Corp.

This year, Wall Street will pool $35 billion of mortgage securities into Remics guaranteed by Freddie Mac, according to an estimate by Oppenheimer & Co.

Freddie Mac officials confirmed that they are looking for ways the agency can package its own Remics. They stressed that no definite plans have been made.

"We're looking at product development ideas," said John Fisk, Freddie Mac's structured finance chief. "This is one of them. Some come to fruition, some do not."

But Wall Street is already bracing for the potential loss of income.

"There are clearly scenarios that would be really hurtful for the Street (which) has taken all the risk of building the secondary market for mortgages," said Linda Lowell, first vice president at PaineWebber Inc., New York.

An executive at another investment bank said that by looking to handle its own Remics, Freddie Mac "is biting the hand that fed it for so many years." It was Wall Street, not Freddie, that drew up the blueprint for mortgage-backed deals.

Investment banks create Remics by bundling together agency-backed mortgage securities, then slicing them into different classes, or tranches, that carry separate interest rates and maturities. The banks profit by getting more for the parts than for the whole securities.

Freddie Mac's role is generally confined to guaranteeing the underlying loans, for which the agency receives a fee.

Mr. Fisk said Freddie Mac is not looking to expand its role in distribution. It would still look to Wall Street to sell its issues to institutional and other investors.

He declined to indicate when Freddie Mac would make a decision, or how much of the Remic business it would want to assume.

Freddie's rival agency, the Federal National Mortgage Association, also guarantees loans that form the basis for Remics. Right now, Fannie Mae is satisfied with the status quo and has no plans to package its own deals, a spokesman said.

This year, Wall Street is on track to pool into Remics some $27 billion worth of Fannie Mae securities, according to Oppenheimer.

If Freddie Mac moves ahead, big mortgage securities players, including Lehman Brothers, PaineWebber Inc., and Bear, Stearns & Co. would be hit hardest, industry observers said.

From where Freddie sees it, investment banks no longer need to have a lock on the Remic market, said Howard B. Hill, the mortgage securities pioneer who authored the study for the agency.

Thanks to advances in technology, "securitization is not black magic anymore," he said. Mr. Hill, who has helped to build mortgage securitization systems for four firms, including Daiwa Securities and Prudential Securities, was approached in late summer by Freddie Mac's structured finance group to study the feasibility of packaging Remics.

By handling its own packaging, Freddie Mac could wring more profits out of a maturing industry, Mr. Hill said.

The agency would receive as much as $750,000 for every $1 billion of Remics that were issued. This compares with the $200,000 to $300,000 that Freddie now gets for guaranteeing the Remics investment banks create, Mr. Hill said.

Furthermore, Mr. Hill, who has given Freddie Mac a 15-page plan for entering the packaging market, argued that mortgage rates could drop if the agency successfully creates Remics.

Instead of individual investment houses putting together $500 million deals for their own sales forces, Freddie Mac would assemble multibillion- dollar packages distributed by a syndicate of investment banks, Mr. Hill explained.

"It would be much more efficient for the market if there was a giant deal for all to cull from," he said.

Industry observers agree that mortgage rates could fall slightly over time if Freddie packaged its own Remics. "It would have to be a lot of sustained volume," said David N. Bernstein, president of Cumulus Associates, a mortgage securities consulting firm in Summit, N.J.

Nothing would legally stop Freddie Mac from creating its own Remics, as long as the agency stopped short of being a deal's "underwriter" - the entity that commits to purchasing the securities, industry experts said.

Freddie Mac "could build the securities and then have a small third party, for a nominal fee, handle the underwriting and still be within its legal scope," said Gareth Plank, mortgage analyst with UBS Securities.

The Office of Federal Housing Enterprise Oversight, the watchdog agency for Freddie Mac and Fannie Mae, said it would probably not take issue with Freddie if it launched a packaging program.

"We do not micromanage Freddie Mac's business," said Gene Carlson, a spokesman for the office. "Unless it had a real safety and soundness issue, we would not be involved."

Mr. Fisk said Freddie Mac has been packaging some of its own deals since Remics were first issued a decade ago, but never on a widespread basis.

"You could count the number of transactions on one hand," he said.

He also indicated that Freddie Mac was keeping Wall Street apprised of its current activities. But when told about the Freddie Mac proposal, many traders, investment bankers, and industry groups said they were taken aback.

"We have not been approached by Freddie Mac," said George Miller, general counsel at the Bond Association, the mortgage security industry's trade group.

Still, Freddie Mac is likely to get its way because of the clout it carries on Wall Street. "I don't think anyone would step up and say I won't sell for you," one investment banker said.

"There might be a lot of hollering from Wall Street," Mr. Hill acknowledged.

Investment bankers, he said, would not like Freddie Mac to supplant them as architects of the securities, handling the "modeling," or creation, of various issues. Freddie Mac would also assume Wall Street's role of providing crucial support, in the form of prepayment projections and economic tracking, Mr. Hill said.

Freddie Mac's biggest obstacle is the cost of entry, Mr. Hill said.

The agency would require systems that take million of dollars to install and maintain. The cost of top talent would run several million dollars more a year, he said.

Freddie Mac, if it proceeds, would likely farm some of its Remic operation out to contractors in the investment industry, said Mr. Hill, whose firm would be among those seeking some of the action.

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