David W. Glenn, president of Freddie Mac, finds himself in an unaccustomed position lately.
Freddie Mac has long been No. 2 in housing finance behind the giant Fannie Mae. But it recently scored a major coup, landing an exclusive contract to buy virtually all the loans originated by the nation's largest residential lender, Norwest Mortgage Inc.
So Mr. Glenn, who is also chief operating officer, can hold his head a little higher, having won a very big round and at least temporarily seized the leadership role from Fannie Mae.
The deal, he said, represented a "sharpening of the differences between the agencies." Freddie Mac is open to other, similar alliances, he said.
Mr. Glenn said the program was part of a broader effort to shift the balance of power in the secondary market Freddie Mac's way by exploiting two trends: the increasing prevalence of mortgage brokers and correspondent lenders and the migration of automated underwriting to the point of sale to increase efficiencies for homebuyers.
When Fannie and Freddie introduced their automated underwriting systems, lenders were required to use them.
Resentment toward the two powerful companies has grown, because lenders saw the requirement as an intrusion by Fannie and Freddie into the primary loan market.
Just when such resentments were reaching a boiling point, Freddie Mac entered the alliance with Norwest Mortgage Inc., the mortgage unit of Wells Fargo & Co.
The alliance permits the Des Moines-based lender to use its own automated underwriting system in exchange for selling virtually all of its loans to Freddie Mac. But the alliance also goes further, enabling the companies to share credit-risk data and other information, to create better efficiencies.
The secondary market competition between Fannie and Freddie often results in nearly instantaneous duplication of products and services. Indeed, Fannie Mae has said it is open to customizing its relationships with lenders.
But since March, when Freddie announced its deal, Fannie Mae has yet to announce an alliance on a par with it. Meanwhile, industry analysts say other larger lenders, including Countrywide Home Loans, are hungry for similar deals.
"The ingredients in the arrangement with Norwest had to do with commonality of strategic direction, willingness to find best-in- class solutions to process needs" and "a common belief that we could lower each other's costs and make each other more effective," he said.
Competing on a basis other than price underscores the direction Freddie Mac is taking, Mr. Glenn explained. Freddie wants to "add value to the lenders' processes, their capabilities, their programs, their products-and we're going to continue to pursue that," he said.
At the national secondary market conference in New York recently, Freddie unveiled its plans to use the Internet to offer lenders an electronic marketplace that would include its own automated underwriting system as well as those of others.
Freddie Mac and Fannie Mae have used their own internal electronic malls to offer services to lenders, but at the conference each company laid out plans aimed at allaying lender concerns over the dominance of their automated underwriting systems. Each company now plans to offer more choices to lenders.
Freddie said it expects its alliance with Norwest and a new Internet platform to benefit its relationship with big and small lenders.
Bringing Freddie's automated underwriting system, Loan Prospector, to the point of sale is "a win for consumers, who get the benefits of clearer, quick decisions and streamlined documentation," said Peter Maselli, senior vice president for business development at Freddie. But the benefits also extend to all parties operating at the point of sale, he added, including brokers and correspondents.
"That's the breakthrough here that I think we're facilitating, and I think it is a huge win for a lot of the smaller lenders that might be acting in the capacity of a broker or correspondent," he said.
But Fannie and Freddie still have some distance to go to meet their customers' needs.
"The agencies still haven't gone as far as the industry believes they should go as far as open architecture," said Melvin A. Steele, senior vice president for secondary marketing at PNC Mortgage in Vernon Hills, Ill.
Freddie and Fannie are "still very firm in their view that if you want to sell a loan to me, it has to go through my engine," Mr. Steele added.
Many mortgage bankers have also been curious about the impact of the recently released risk-based capital regulation governing Fannie and Freddie, crafted by the Office of Federal Housing Enterprise Oversight.
While many details are to be worked out with OFHEO, Mr. Glenn said, Freddie's risked-based management "already reflects the kind of thinking that OFHEO is bringing to the table" with its proposed regulations. "That thinking is, 'Lets not look at the dollar amount of the asset, lets look at the risk exposure,'" he said.
The changes that risk-based capital regulation may bring to Freddie will not effect customer relationships, Mr. Glenn said. The regulation's biggest impact on the market, he said, may be to "hasten the move toward risk-based pricing for consumers."
Mr. Glenn also noted that Freddie may, because of capital market conditions, use its innovative "Moderns" deal to continue to manage its risk positions. OFHEO had given Freddie kudos for its use of this capital markets tool, which the company brought to market in April 1998.
In the transaction, Freddie brought rated derivative securities to market to offset its risk of default on $20 billion of mortgages it bought in 1996. Mr. Glenn said the Moderns deal, deeper mortgage insurance, and other ideas are all "arrows in the quiver of managing our risk position, given the various returns that are available."