Fannie Mae and Ginnie Mae are seeking to protect taxpayers as a flood of new lenders apply to do business with them. That’s also helping big banks’ profit and blunting Federal Reserve efforts to boost housing.
Fannie Mae, the government-supported mortgage financier, has begun limiting how many loans annually it will guarantee or buy from certain firms. Ginnie Mae has moved slowly with responses to applications, according to David Lykken, an industry consultant. The U.S.-owned bond insurer has gotten tougher this year about approving lenders even as it’s signed up about 50, Ginnie Mae President Ted Tozer said in an interview.
Limited competition in the industry and a lack of capacity to meet demand is helping JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon get “very high” mortgage margins. That’s frustrating central bankers such as William Dudley, the Federal Reserve Bank of New York president, who said this month that mortgage rates are higher than they could be after the Fed said it plans to acquire $40 billion of home-loan securities a month.
“More direct access to Fannie would end up in more mortgage companies getting a better price and consumers would benefit,” said John Robbins, head of Bexil American Mortgage Inc., who founded two lenders later sold to banks now part of JPMorgan and Wells Fargo & Co. “The problem is, if you’re Fannie you just can’t let all these companies have unlimited access. You don’t want to give a high-speed, temperamental race car to someone who just got a driver’s license.”
The conflict between protecting taxpayers and encouraging more lending to help the real estate market recover from the worst slump since the Great Depression shows the challenges facing the government and the industry as about 3,500 people attend the Mortgage Bankers Association’s annual conference in Chicago that started yesterday.
U.S.-backed mortgages still account for about 90 percent of new lending in the almost $9.6 trillion home-loan market four years after Fannie Mae and rival Freddie Mac were rescued by taxpayers.
The companies “are playing an outsized role: in a properly functioning market, Fannie Mae should not have such a significant share,” Chief Executive Officer Timothy J. Mayopoulos said yesterday in a speech at the conference. “We see little evidence of substantial private capital ready to meet the very significant market needs.”
David Stevens, the MBA president, former Federal Housing Administration head and ex-Freddie Mac executive, says his organization is worried that the company and Fannie Mae are changing a broad range of rules without first going through the same steps to seek public input as other arms of the government.
“No matter how much they say they’re being transparent with the customers, it really pales in comparison to the process required by other rulemakers,” he said.
Fannie Mae, which has more than 1,000 approved lenders, won’t disclose how many have been capped or its total applications and approvals this year for customers that originate and service mortgages, or so-called seller-servicers.
The delivery limits affect a “relatively small number” of lenders, “primarily” new ones, according to Zach Oppenheimer, a senior vice president who heads customer engagement.
Fannie Mae’s volume limits, based on the net worth and business profile of counterparties, add to steps by U.S. and international lawmakers and regulators that may hurt competition and “consumer access,” Stevens of the MBA said.
The mortgage industry remains in flux six years after mortgage defaults began climbing, reaching unprecedented levels that would freeze private markets and cause hundreds of lenders to collapse. Bear Stearns Cos. and Lehman Brothers Holdings Inc., the top underwriters of so-called non-agency mortgage bonds connecting investors with homeowners, imploded in 2008.
Fannie Mae and Freddie Mac were seized by the government that year and have received $137 billion of aid since then, enabling them to finance about two-thirds of new loans. Even with steps to reduce their dominance, including increases to how much they charge for mortgage guarantees, there are few signs of progress on legislation that might shrink their role.
“Reform is not going to happen next year and probably not until 2015,” said Isaac Boltansky, a Washington-based policy analyst for Compass Point Research & Trading LLC.
The “uncertainty” over their future is bad for the companies as they seek to hire and retain qualified employees and make decisions such as technology investments, Freddie Mac Chief Executive Officer Donald Layton said during a panel at the conference in Chicago.
The development of Fannie Mae and Freddie Mac has been on the backburner this year amid a presidential election and a recovery in housing, including higher prices, home sales and construction. That’s being driven in part by the Fed’s policy of buying mortgage bonds to push down borrowing costs. The Obama administration also adjusted rules to allow more borrowers to tap record-low rates.
Refinancing applications soared to a three-year high with 30-year mortgages reaching 3.36 percent this month, straining staffs of lenders, which held rates higher than they could offer in part to reduce demand.
Mortgage rates could be more than 0.4 percentage point lower based on the average gap between bond yields and borrowing costs over the past decade, according to data compiled by Bloomberg. New expenses and legal risks contribute to the higher spread, said Bexil’s Robbins, also a former chairman of the mortgage-bankers group.
At JPMorgan, mortgage-production margins are “very high” at “well over” 2 percent, up from less than 1 percent historically, Dimon said on an Oct. 12 conference call about its record $5.7 billion in quarterly earnings. The bank’s home-loan business lends directly to consumers and buys mortgages from about 800 firms.
“Obviously one day that will normalize,” Dimon said. “And in the meantime, you get volume and higher spreads.”
Three days later, the New York Fed’s Dudley explained in a speech that only part of the drop in debt yields created by the central bank’s actions was being passed on to consumers, the flip side of Dimon’s expanded profits.
The factors behind the wider spreads “warrant ongoing attention from policymakers,” Dudley said.
Dudley cited “a concentration of mortgage origination volumes at a few key financial institutions” as part of the cause. At the same time, Mayopoulos said that “we’ve seen significant deconsolidation in the industry as major players pulled away or withdrew completely.”
Over the past year, more companies have been taking market share as firms including Bank of America Corp. and MetLife Inc. abandoned roles buying loans from smaller lenders, getting them guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae and selling them to investors.
Those middlemen were “absorbing a lot of risk” that Fannie Mae must take on itself when dealing directly with smaller firms, Mayopoulos said. “We very much want to serve smaller lenders but we want to do that in a prudent way,” he said. “We’re also serving the taxpayers.”
During the second quarter, 47 percent of Fannie Mae’s business came from its top five customers, down from 65 percent a year earlier, according to a regulatory filing. A decline that began last year “accelerated sharply” this year, Credit Suisse Group AG analyst Mahesh Swaminathan wrote in an Oct. 18 report.
Still, Wells Fargo & Co. has a record market share. The San Francisco-based lender made or bought 33.1 percent of home loans originated in the first half of 2012, according to newsletter Inside Mortgage Finance. That’s almost twice the 16.8 percent share recorded by Countrywide Financial Corp. in 2007. That year, Wells was second with 11.2 percent.
JPMorgan is now in second place with 11.1 percent. The rest of the top five -- now U.S. Bancorp, Bank of America Corp. and Citigroup Inc. -- also are smaller than five years ago.
Fannie Mae’s new delivery caps, which it may increase as companies gain capital and prove their operations, can affect existing customers with financial trouble or poor performance as well as new clients, Oppenheimer said. Newsletter National Mortgage News earlier reported the restrictions.
Under its previous policy, a lender with a $2.5 million net worth, its minimum, could “theoretically deliver billions of dollars of loans,” Oppenheimer said. If the lender was forced to buy back loans because of faulty underwriting, it wouldn’t “take that many bad loans to add up to substantial costs and wipe you out. Ultimately if those institutions fail, it would be the taxpayer who would be paying.”
Fannie Mae’s Oppenheimer said the caps may not have much effect on the cost of loans because borrowers often turn to their servicers to refinance and Fannie Mae is already doing business with more than 1,000 lenders.
“I’m not certain that the addition of many new originators would have a material change to margins in today’s market.”
Rob Hirt, chief executive officer of RPM Mortgage Inc., a Walnut Creek, California-based lender, understands the decision.
“If you’re looking at it from Fannie’s perspective, I don’t see how you can blame them,” he said. Still, “the small guys are really getting whacked in some ways, which at the end of the day is bad for the consumer.”
Hirt said his firm, which will sell about half of its $6 billion of loans this year to Fannie Mae, has been told to expect that “what you’re selling to us you can keep selling to us,” he said.
A direct relationship with Ginnie Mae, whose bond guarantees help lenders sell off FHA loans allowing low-down payments and mortgages for veterans, is also in demand. The agency, which has more than 300 approved issuers, relies on the companies to do work including advancing payments missed by borrowers to bond investors as they service outstanding loans.
Lykken, the managing partner of consultant Mortgage Banking Solutions, is doing work for four lenders seeking Ginnie Mae approval, which he said should be considered a “privilege” requiring scrutiny. One has been waiting for more than a year.
“You send in your application and you don’t really hear anything for months, nada,” he said. “People are up in arms about it. They’re frustrated, but they’re afraid to say anything.”
Ginnie Mae’s Tozer said it’s not changing its minimum standards, which represent a “starting point” to getting its approval.
Instead, it’s looking at lenders in a more “thoughtful” and “holistic” way, often leading to more back and forth. For example, a company that plans to outsource servicing work to a less established firm may need to prove it has an executive experienced in the field on its own staff, he said.
“There’s no value to me or them in getting people in the program that aren’t going to be successful,” Tozer said in an interview at the conference.
Lenders forced to sell mortgages they originate to bigger companies, instead of directly tapping government programs, must usually give up contracts to manage outstanding debt created with new loans. Prices for those servicing rights have dropped as lenders such as Bank of America stopped buying them.
Even with rates on new loans at record lows and their default risk small, buyers pay three to four times the contract’s annual payments, down from five to six times historically, said Norcom Mortgage’s Philip DeFronzo. The yearly payments typically equal 0.25 percentage point of loan balances.
“It’s just not as competitive a marketplace right now,” said DeFronzo, president of Avon, Connecticut-based Norcom, which is among lenders holding on to more of those contracts. Firms that have to sell the servicing rights cheaply lose revenue that can be used to offer less-expensive mortgages.
Lenders also face loan standards from so-called aggregators that are stricter than they can get when dealing directly with government programs, said John Fearon, the majority owner of Fearon Financial LLC. The company, which also lends under the name Smarter Mortgages, is now seeking Fannie Mae approval.
“We’d probably not be as tight as some of the larger institutions in making our own underwriting decisions,” he said. “It would give us the ability to serve a lot more of the market in the 11 states we’re in,” including Ohio and Texas.
Fed Governor Elizabeth Duke said this month the economy needs more small lenders and that new regulation may drive more out of business. These firms historically have been willing to give more consideration to good borrowers with unusual situations that bigger lenders don’t want to deal with, she said.
“You need to make sure you can still make the irregular loan, the one that doesn’t fit exactly in a box,” Duke said.
Regulators are writing rules such as national servicing guidelines that will be relatively more costly for smaller lenders to comply with, said Robert Bostrom, who served as general counsel for Freddie Mac for five years through 2011.
“There’s just not enough capacity in the marketplace,” said Bostrom, who is now at law firm SNR Denton. “And we all know who’s going to end up paying for it: the consumer.”