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Published: June 2, 2013 3:00 a.m.
Fannie Mae profits from lenders
Role raises questions on its future
Jody Shenn and Dakin Campbell | Bloomberg News
NEW YORK – Fannie Mae is snatching potential profits away from mortgage lenders as it posts record earnings that are fueling industry concern that the government-backed company is regaining its swagger even as lawmakers plot its demise.
The company has ramped up its purchases of home loans from lenders for cash, in the process cutting out originators from the more profitable business of creating and selling bonds backed by the debt.
About 31 percent of the $305 billion in new Fannie Mae-guaranteed securities in the first four months of this year were tied to so-called cash window purchases, almost triple the share in early 2011, according to data compiled by Bloomberg and JPMorgan Chase analysts’ estimates.
The shift is morphing Fannie Mae into more of a middleman between homeowners and the bond market, a role typically played by originators or the larger banks that buy their loans such as JPMorgan and Wells Fargo.
The trend underscores growing tension between the company and lenders who are concerned that it’s trying to exploit its strength in a market where it backs almost half of new bonds to repay taxpayers, rebuild its brand and survive.
“It’s a defend-the-Alamo philosophy,” said Bill Dallas, chief executive officer of Skyline Financial in Calabasas, Calif. Still, “they shouldn’t engorge themselves in profit if they can share that with the lenders that take the risk.”
Lenders are also concerned that Fannie Mae is working to maintain its dominance in the market over Freddie Mac, a company with a similar mission that was also seized by the U.S. in 2008, according to five mortgage executives who asked not to be named to preserve their relationship with the company.
“We don’t play this big of a role because we want to,” Chief Executive Officer Timothy Mayopoulos said in an April Bloomberg Television interview. “It’s really because we need to in order to provide liquidity and funding to the market.”
President Obama and both Democratic and Republican lawmakers in Congress have said they want to wind down the two companies and shrink the government’s share, currently about 90 percent, in the market. No one has yet put forward a plan, though lawmakers in the Senate are currently working on bipartisan legislation. Republicans in the House of Representatives are also writing a bill.
The expanded use of Fannie Mae’s cash window is a responsible practice, according to Zach Oppenheimer, a senior vice president who heads customer engagement at Fannie Mae. It prevents some inexperienced lenders from creating its bonds because they haven’t shown the appropriate operational and financial resources, he said.
Others see different goals, such as a desire to give Fannie Mae a chance to earn profits and build a business that may outlast an eventual mortgage-finance overhaul that Barclays analysts said could leave it without its traditional advantages if it survives.
“If they can get a nickel on any avenue, they will do it,” said Andy Jaymes, principal at Jaymes Financial, which helps clients buy and sell loans including mortgages. It’s good news that Fannie Mae and Freddie Mac are profitable, he said.
Doubt over Fannie Mae’s motivations reflect its past, when banks and mortgage insurers formed a lobbying group called FM Watch to seek to rein in the firm and Freddie Mac.
Later, books on the financial crisis – including “Guaranteed to Fail” by four New York University professors and “Reckless Endangerment” by Gretchen Morgenson and Joshua Rosner – put Fannie Mae’s political might as among the causes for the worst housing slump since the 1930s.
There are signs the company is seeking to rehabilitate its public brand as Congress and the Obama administration debate its future.
The top of its website features links to a “progress report,” filled with information about its return to profitability and help for homeowners.
“Nothing in the progress report is different than what we’ve been saying for the last four years,” Wilson said. “We think it’s important for people to understand what we’re doing given the extraordinary investment by taxpayers.”
The Federal National Mortgage Association was formed in 1938 as part of President Franklin Roosevelt’s New Deal intended to help lift the country out of the Great Depression. It was then split off from the government in 1968 while retaining an aura of taxpayer backing.
The U.S. seized Fannie Mae and Freddie Mac (the Federal Home Loan Mortgage Corp.) in September 2008 and began standing behind them more explicitly to prevent their collapse from further roiling housing.
As home prices began rebounding after a five-year slump, Fannie Mae reported the largest annual profit in its history in 2012, with its net income reaching $17.2 billion, and the company’s $8.1 billion first-quarter profit was its best ever.
The current terms of its bailout agreement require essentially that all its profits be sent to the U.S. as dividends. After its latest payments to the Treasury Department, Fannie Mae will have sent a total of $95 billion.
“The Fannie Mae execs are going to do as much as they can to ensure the viability of the company and ensure that it survives,” said Kevin Barker, an analyst at Compass Point Research & Trading. “To the extent they are operated like a private corporation, they may act like one,” he said. Still, the “priorities and strategic goals may not be in the best interests of the housing market as a whole.”
While Fannie Mae and Freddie Mac’s recent earnings are positive for taxpayers, the record profits should also be considered a signal that the mortgage-finance system is being transformed at a pace that’s too slow, according to David Stevens, president of the Mortgage Bankers Association.
“We need to be really clear on what the outlook for these two companies is,” said Stevens, who is also a former Federal Housing Administration chief and Freddie Mac executive.
“If it’s privatization, maybe driving toward the most profits make sense. If it’s not, more work needs to be done on preparing for their future.”
http://www.journalgazette.net/article/20130602/BIZ/306029967/1031/BIZ
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