As Fannie Mae and Freddie Mac push into the booming market for subprime mortgages, lenders are reacting with everything from wholehearted support to bitter protest.
Some executives, especially at smaller companies, see the agencies offering a simple and safe way to participate in the notoriously volatile business.
"It makes the subprime business more palatable for us," said Thomas Stacy, vice chairman of Gulf Properties Financial Services, Gulfport, Miss. "Doing this without their endorsement kind of makes you nervous."
But others, including executives at subprime speciality companies, view Fannie and Freddie as unnecessary intruders. They say the two titans will sap the market of its profitability.
"The agencies have incredible tax, funding, and capital advantages," says Ted M. Johnson, manager of finance for Amresco Residential Capital Markets, a unit of subprime lender Amresco Inc.
Such controversy is almost inevitable when Fannie and Freddie-the hubs of the modern mortgage market-press into new areas.
"It's a very emotional issue," said Karen Shaw Petrou, president of ISD/Shaw Inc., a Washington, bank consulting firm. "This goes directly to the heart of lenders' franchises."
Until recently, Fannie and Freddie focused almost exclusively on supporting A mortgages. Indeed, the agencies' standards have served as the definition of high-quality mortgages.
But now, through different approaches, Fannie and Freddie are experimenting with B and C mortgages-loans to people with blemished credit histories. This market has been growing by more than 50% for each of the past few years, with originations reaching an estimated $200 billion last year.
This spring, Freddie Mac significantly expanded its involvement by purchasing and placing its guarantee on $227 million of home equity loans originated by First Union Bank. Freddie Mac is looking for more deals, with the goal of buying as many as 40,000 loans or $2.5 billion of production this year.
"We are trying to build relationships with some of the larger and better originators" of home equity and B and C loans, said David J. Borsos, director of new products at Freddie Mac.
Fannie Mae executives say they are taking a different tack. "I don't feel we'd go out to a (subprime lender) like Champion Mortgage and say, 'We're going to buy a package of your B loans and securitize them,'" said Ann Logan, executive vice president and chief credit officer at Fannie Mae.
Instead, Fannie Mae will consider backing subprime loans that are originated by lenders as part of community development efforts for immigrants and others who lack traditional or pristine credit, Ms. Logan said. This could potentially be another purchase path for Freddie Mac, industry observers said.
Both agencies say they are acting in the interests of consumers, lenders, and shareholders.
Analysts said the moves could give a lift to the agencies' profits and advance their mission.
"Freddie and Fannie understand they must balance good economics with good politics by extending mortgage lending into areas that have been traditionally underserved," said Peter A. Russ, who follows the agencies for Shelby Cullon Davis, a money management firm in New York. "This is a way a fulfilling their mandate and making money."
Observers also agree that the agencies' involvement could trim interest rates for consumers of subprime mortgages. In the market for top-quality loans, the agencies are said to reduce rates by about three quarters of a percentage point, thanks to relatively low funding costs.
"This would be great news for consumers," said Larry Swedroe, the former vice chairman of Prudential Home Mortgage and now principal at Buckingham Asset Management, St. Louis. "But every established subprime lender in the U.S. will have to look at their margins and their profits shrinking."
That is why many subprime specialists are concerned. Some executives at large, traditional mortgage companies eyeing the subprime market also are expressing concern, though few are willing to speak for the record.
Mr. Johnson of the Amresco unit went public with his objections last week, during a conference on mortgage securities in New York sponsored by Information Management Network.
The agencies "are clearly intruding into what is the subprime market," Mr. Johnson said. "It needs to be stopped, and it hasn't happened."
Mr. Borsos of Freddie Mac downplayed the concerns about lender profitability. "If we are taking money out of people's pockets, then these are people who are acting on inefficiencies in the market," he said.
Jeffrey S. Detwiler, a managing director at Residential Funding Corp., told the conference that many traditional lenders are too concerned about their relations with Fannie and Freddie to protest their moves into the subprime market.
"They're scared to death of the agencies," said Mr. Detwiler, whose firm securitizes mortgages. "They're not going to step up; they have too much to risk with the agencies turning on them."
Meanwhile, at least one leading lender says it has little worry about the agencies' involvement in subprime loans.
"There is room in this business for everyone," says James W. Richens, regional director with Countrywide Securities Corp., a unit of Countrywide Credit Industries.
Critics say they will talk to Congress or government housing authorities to try and temper the agencies' activities. Indeed, the House Banking Committee plans to look into the matter, a House staff member said.
But observers say Fannie Mae and Freddie Mac are likely to prevail.
"There has never been an effective consensus to block the agencies from expanding into new areas," said Ms. Shaw Petrou. "I don't know if that can happen now."
