June 22, 1999  

  Business Focus
Fannie Mae and Freddie Mac Scramble for New Mortgages
CARLOS TEJADA
Staff Reporter of THE WALL STREET JOURNAL


As the mortgage industry starts to slow from last year's heady pace, Fannie Mae and Freddie Mac are moving to ensure they have a steady supply of new mortgages.

In a series of recent agreements, the two big mortgage buyers are signing deals with big mortgage lenders who agree to sell them most of their basic mortgages. For the lenders, the agreements should result in lower costs, and that could mean lower fees for home buyers and those refinancing home loans.

Freddie Mac, based in McLean, Va., started the action in March when it signed an exclusive deal with Wells Fargo & Co.'s Norwest Mortgage, the nation's largest mortgage lender. The multiyear agreement calls for Norwest, which originated $57.6 billion in conforming mortgages last year, to sell nearly all those mortgages to Freddie Mac.


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Fannie and Freddie Strike Deals ... Lenders that have agreed to sell most of their loans, in billions:
Lenders 1998 Total
Mortgage Volume
Fannie Mae
  Fleet Mortgage $35.86
  North American Mortgage 30.81
  Resource Bancshares Mortgage 15.43
Freddie Mac
  Norwest Mortgage $109.45
  Bank of America 62.23

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Fannie Mae, based in Washington, has so far signed up three big lenders, including Resource Bancshares Mortgage Group Inc. of Columbia, S.C. "We'll work with primarily the one agency, which makes our lives a lot simpler," said Steve Herbert, Resource's chief financial officer.

Such agreements are replacing more informal relationships between the companies and lenders. Traditionally, lenders have sold their loans to both companies, depending on which offered the better deal. Fannie and Freddie then either sell the loans or keep them in their portfolios.

Getting Complicated

For lenders, the practice has grown complicated as both Freddie and Fannie developed their own technology for screening and approving loans. At the same time, many lenders had their own computer systems for loan evaluation, meaning they might have to run each loan through two or three different computers.


In fact, that's the main reason Norwest earlier this year approached both Fannie and Freddie looking for a deal. The company had invested heavily in its own electronic mortgage-underwriting system, but felt pressured by both Fannie and Freddie to adopt their systems.

"It's like if you live in a house where the electricity works perfectly well, and I said, 'Let me tear out your white wires and put in red ones, and we'll charge you every time you turn on the lights.' Why would you do that?" said Mark Oman, Norwest Mortgage's chief executive.

The agreements come as investors have increasingly turned a critical eye on Fannie and Freddie. Shares of the two companies have fallen as investors wondered whether they will be able to continue big profit gains in the midst of a slowing mortgage market. Investors are also concerned that a coalition of industry groups, FM Watch, has been formed to keep the two from moving into other businesses, but analysts don't expect big problems.

Though details of the pacts haven't been disclosed, people familiar with them say they include reduced fees to use Fannie's and Freddie's proprietary computerized mortgage-underwriting systems, which can run between $10 and $50 per loan. The pacts also allow lenders to sell a loan even if the loan application was accepted by another computer system.

Fees Are Falling

The deals also include pricing agreements on guarantee fees, which Fannie and Freddie charge to lenders in exchange for guaranteeing loans they buy. But those fees already were falling: Fannie Mae saw its average guarantee fee fall to 0.202% of the loan amount last year, or $404 on a $200,000 loan, from 0.227% in 1997. Freddie's average fee fell to 0.214% last year from 0.229% in 1997.

Such reduced costs could help lenders when the mortgage market cools. Last year, more than $1.5 trillion in mortgage loans were written as the average plain-vanilla 30-year loan fell to 7% and below. Last week, the average rate was nearly 7.8% on a 30-year fixed mortgage, according to HSH Associates of Butler, N.J., putting an end to high levels of mortgage refinancings.

The agreements also are expected to eliminate duplicate steps such as credit checks and loan-quality monitoring.

Such efficiencies could accelerate the drop in the cost of taking out a mortgage. Already, thanks in part to competition and computerized underwriting, the initial fees and charges on a mortgage have dropped to 0.76% of the loan amount in April from 0.84% in April 1998, according to the Federal Housing Finance Board.

"These agreements are ultimately going to turn into consumer benefits," said Tom LaMalfa, managing director of mortgage research concern Wholesale Access, and a frequent Fannie and Freddie critic.

The pacts also have the potential to shift market share between the two companies. The Norwest deal drew Freddie Mac, which traditionally lags behind Fannie Mae, even with Fannie in terms of market share, though Fannie's recent deals brought it back to about 57%, said Jonathan Gray, analyst with Sanford C. Bernstein & Co. In exchange for guaranteed sales, he says, both Freddie and Fannie are giving up some long-term profit growth.

Last year Fannie Mae reported net income of $3.42 billion, or $3.23 a diluted share, up 12% from a year earlier. Freddie Mac posted net income of $1.7 billion, or $2.31 a share, up 22% from a year earlier. Both predict future strong earnings growth, but that won't come as easily given the expected slowdown in lending.

"We have seen two years of huge mortgage volume," said John Fisk, Freddie Mac's executive vice president, single-family securitization group. "Nobody thinks that's going to go on forever."


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