Wall Street is taking a dim view of plans by Fannie Mae and Freddie Mac to create a new type of mortgage security.
Traders say the new security, cobbled out of the servicing fees that are tucked into mortgage payments, will have trouble winning investor support.
The planned securities look too much like a type of investment the housing agencies already issue, traders say. They also note that the securities' structure could encourage prepayments that cut into investment returns.
The move by Fannie Mae and Freddie Mac "could be good for mortgage bankers, but for us it's a nonevent," said Michael Schumacher, head of research in mortgage-backed securities at Smith Barney, New York. "I don't see any reason for Fannie and Freddie to do it."
For one thing, Mr. Schumacher said, the products are virtually identical to a type of security called an interest-only strip. These bonds are backed solely by mortgage interest payments, which can stop at any time as borrowers prepay.
The new bonds would be supported only by servicing fees, which are part of the interest that borrowers pay.
There is also concern about accelerated prepayments now that mortgage lenders would no longer have to carry servicing on their books. Wall Street analysts believe some lenders will securitize their servicing, collect their money, and then go after the customer for more business.
"It could lead to (lenders) being more eager to solicit these loans for refinancing," said Linda Lowell, first vice president in the mortgage securities group of PaineWebber Inc.
Freddie Mac, formally the Federal Home Loan Mortgage Corp., has encountered similar sentiments as it pounded the pavement on Wall Street, talking to traders and brokers about the new product. "Investors are not very happy with it," said James Cotton, vice president of marketing at Freddie Mac. "They do fear it will change prepayment speeds."
Mr. Cotton and representatives of Fannie Mae, formally the Federal National Mortgage Association, say Wall Street will ultimately find that prepayment speeds under the new product are manageable.
In fact, given the agencies' track record on Wall Street, the securities may very well find takers. Between them, Fannie Mae and Freddie Mac have pioneered the market for mortgage securities and crafted a raft of products from the pieces of carved-up home loans. The latest offering - the servicing product - represents an estimated $20 billion market.
Donna Callejon, senior vice president with Fannie Mae, expressed confidence that the servicing security will become part of the mix. "It will fit very smoothly into the mortgage-backed securities market," she said.
The product will also prove a boon for mortgage bankers, making it easier for them to manage servicing revenues, she said. The agencies acted now to capitalize on an accounting law change, FASB 122, which took affect in January and made it possible to handle servicing differently.
"We did this as a response to the mortgage banking community's desire to be in the servicing business but not have to deal with certain complexities and risks," Ms. Callejon said.
Thomas Ricketts, chief executive at Standard Federal Bank, plans to be among the program's first takers.
The Troy, Mich., savings bank is negotiating with Fannie Mae on securitizing a pool of $500 million of loans with their servicing fees included, Mr. Ricketts said.