A New Role for Fannie, Freddie?

Twin housing finance giants Fannie Mae (FNM) and Freddie Mac (FRE), both now effectively under government control via conservatorship, may be taking on yet another expanded role in supporting U.S. mortgage markets, according to a report filed Monday at the Wall Street Journal. The news daily reported that the Federal Housing Finance Agency is considering using the GSEs to backstop the warehouse credit market, vital for so-called independent mortgage bankers that do not collect deposits from consumers to fund their lending activities. Warehouse lines provide a non-depository lender a credit facility to fund the closing of mortgages; the Mortgage Bankers Association estimated recently in a letter sent to regulators that warehouse credit availability declined 85 percent between 2007 and 2008, to just $20 to $25 billion. In a market expected to originate as much as $1.8 trillion in new mortgages this year — also based on a recently-updated MBA forecast — mortgage bankers (at least, non-bank mortgage originators) have been pushing for expanded access to credit to fund soaring demand for mortgage refinancings. According to the Journal, the FHFA is considering a proposal to allow the GSEs to guarantee warehouse debt, and has asked the MBA to put together a detailed proposal on how a GSE guarantee of such credit facilities might work. The MBA and other independent mortgage bankers say a dearth of warehouse credit is allowing mega-banks like Bank of America and Wells Fargo — which have dominated first mortgage production thus far in 2009 — to effectively take market share away from other sources of origination volume; the MBA says this lack of competition is likely to push higher rates to consumers. It’s unclear just how a GSE guarantee of warehouse credit would function, or how the GSEs would fund such an effort; but the Journal suggests that Treasury and Federal Reserve officials have blessed the idea, and the MBA’s John Courson told the Journal that he expects the trade group to have a final proposal developed by the end of this week. Last week, the MBA suggested changing risk-based capital weightings for warehouse lines of credit, including assigning a ratio akin to GSE debt securities for warehouse lines used to fund loans saleable to the GSEs. Currently, warehouse lines are subject to a 100 percent capital weighting; the MBA wants to see that ratio reduced to as little as 20 percent in certain cases, and has argued that the high capital weighting assigned to warehouse lines has made the funding source an easy target to reel in for banks looking to improve their capital positions. See earlier story. Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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