Academic journal article ABA Banking Journal

How Freddie Sees It

Academic journal article ABA Banking Journal

How Freddie Sees It

Article excerpt

Newly restructured Freddie Mac is Pushing for more bank business. It's also keeping a close eye on loan quality

Traditionally, the Federal Home Loan Mortgage Corp. was perceived by many commercial bankers to be an adjunct to the thrift industry. The fact that it was governed, since its 1970 debut, by the now-defunct Federal Home Loan Bank Board enhanced this perception.

To this day, Freddie Mac's mission continues to be encouraging the funding, through the secondary mortgage market, of home ownership-the classic aim of the thrift industry. However, with the financial developments of the last few years and the passage of the Financial Institutions Reform, Recovery and Enforcement Act, Freddie Mac is changing.

ABA Banking Journal recently discussed Freddie Mac's operations as it enters its third decade with Leland C. Brendsel, chairman and CEO, and David W Glenn, president and chief operating officer. Banks, thrifts, and Freddie. As an organization that has been closely allied with the thrift industry, what does Freddie Mac sec ahead for thrifts'?

For the time being, Brendsel says, the organization is operating under the assumption that there will continue to be a separate thrift industry for the next few years. Brendsel says Freddie is also assuming that a significant number of thrifts will disappear through closure or consolidation.

While many observers expect the surviving thrifts to be converted to banks, Brendsel says the agency does not have a view on that. Instead, he makes the point that regardless of what the institutions are called, he expects there will continue to be a cadre of institutions that specialize in residential mortgage finance.

As the thrift business evolves, Freddie Mac will increasingly find itself dealing with commercial banking organizations that want to sell their loans into the secondary market. As a result, Brendsel says, Freddie Mac is making efforts to build further relationships with them.

Glenn says this push began about a year and a half ago, when Freddie Mac decided it didn't have enough banks in its customer base. (Currently, banks account for about 10% of the number of loans sold to Freddie, according to Glenn. That number would be higher if the activities of mortgage banking subsidiaries of banking companies were also counted, he points out.)

"The thrifts found the mortgage-backed security business before the banks did," says Glenn, "but the banks have been in the mortgage business for years. "

"They approach the business differently than the typical thrift seller," says Brendsel. Often the sole point of contact between Freddie and a thrift, he continues, is the institution's secondary market officer or a selected loan officer. By contrast, he says, banks tend to include the investment manager, as well.

Glenn notes that banks' interest in securitizing mortgages is often driven by the belief that mortgages can be "the linchpin of the customer relationship." Where checking accounts were once considered the prime connection between a bank and a customer, Glenn says, more institutions are using the mortgage as the centerpiece from which they can cross-sell additional services. Credit effort. "The entire home lending industry is changing," says Brendsel. "Many more mortgage lenders, when they make a loan, make it with the intent of selling it immediately."

Partly as a result of this shift, says Brendsel, Freddie Mac will be scrutinizing more thoroughly the loans that it buys and packages into its securities.

Another reason for the increased scrutiny is the state of the economy and the health of the lenders it does business with.

Looming recession, the Iraqi crisis, and increased interest rates have slowed the rate of mortgage loan originations and home sales. (Brendsel, reading the situation as of mid-September, hoped to see a return to more normal origination levels in 1991-with the Iraqi situation a major question mark in the forecast. …

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