Magazine article American Banker

Battle Is on for Mortgage Securities: Fannie Mae and Freddie Mac Using Discounts to Lure Thrifts

Magazine article American Banker

Battle Is on for Mortgage Securities: Fannie Mae and Freddie Mac Using Discounts to Lure Thrifts

Article excerpt

LAS VEGAS -- A wave of mortgage-backed security issues pending at a number of thrifts is escalating competition between the two agencies at the center of the conventional secondary mortgage market.

At stake are millions the agencies will earn in fees charged to the thrifts for guaranteeing payments from the mortgages backing the issues.

Thrift officers at the national secondary mortgage market conference here are enjoying the results: reduced fees and other negotiated incentives to choose between the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac.

"Freddie Mac has shown a real willingness to deal," said an officer of one thrift working on a $200 million issue.

But he added, with cocktail in hand at the Fannie Mae hospitality suite: "I'm here to see what Fannie Mae can do. They've made it clear they want our business."

Such trading huddles are the real focus of this annual conference, the 29th such session sponsored by the U.S. League of Savings Institutions and the premier event of the secondary mortgage market. The secondary market is where lenders sell mortgages, or securities issued against the loans, to investors as a way to get cash for making more loans.

Such security trades added $85 billion in capital to the mortgage markets last year alone. But Freddie Mac in June introduced a new wrinkle that portends much heavier volumes to come: collateralized mortgage obligations.

A bond-like instrument issued with the securities as collateral, the obligations break mortgage pools into a series of obligations that result in more predictable payments to investors. The unpredictability of prepayment rates on mortgage-backed securities had discouraged investors from the large financial institutions such as pension funds and insurance companies.

More importantly to thrifts -- many with portfolios still dominated by fixed-rate mortgages made years ago at interest rates well below the thrifts' current cost of funds -- the obligations are debt issues and not sales of assets.

To turn the low-rate loans into cash, thrifts must sell them for less than face value to give investors a yield competitive with other money markets. How the New Structure Works

But the new obligation structure lets thrifts swap the old loans for the agency securities, use them at a discount as collateral for selling the obligations, and not have to book the discount as a loss -- as they must in a sale of assets.

"It's a way for thrifts to get those old loans off their books without having to suffer," said Rebecca Boyd of Fannie Mae.

Thrifts have yet to issue any collateralized mortgage obligations, though Freddie Mac and investment bankers have earned millions from the issues and the better price they command from investors.

"It's been a matter for them of working out the paper work -- the lawyers have had to wrestle with it," said Dall Bennewitz, a senior vice president at the U.S. League. "Once they get the first ones out, they'll come pretty quickly. They'll wonder what was so tough with the first one. …

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