New Task Seen for Fannie, Freddie

By JAMES R. HAGERTY

The regulator of Fannie Mae and Freddie Mac is considering giving the government-backed mortgage companies another role: helping to finance small mortgage banks.

A spokeswoman for the regulator, the Federal Housing Finance Agency, said it is looking at ways that the two companies might help revive the market for so-called warehouse loans, which are loans made to mortgage banks. This possible role for Fannie and Freddie is the latest sign of how they are being used increasingly as instruments of government policy rather than corporations focused on shareholder returns.

Reuters

John Courson, head of the Mortgage Bankers Association,wants Fannie and Freddie to help small lenders.

Demand for mortgages is surging as low interest rates prompt millions of Americans to refinance. New U.S. first-lien home-mortgage loans granted this year will surge to $2.78 trillion, up 72% from 2008's depressed level, the Mortgage Bankers Association predicts. But mortgage banks have been hobbled in recent months by a dearth of credit, making it hard for them to respond to that demand.

Partly as a result of this credit crunch, giant full-service banks like Bank of America Corp. and Wells Fargo & Co., which don't need warehouse funding, are increasing their dominance of the mortgage market. Consumers will face higher interest rates and slower service if mortgage banks can't get enough credit to compete with the giants, mortgage bankers argue.

The regulator has asked representatives of mortgage banks, including the Mortgage Bankers Association, to come up with a detailed plan for Fannie and Freddie to help mortgage banks get credit. John Courson, chief executive officer of the association, said in an interview that the plan should be ready to be presented to the regulator within about a week. One possibility is that Fannie and Freddie will guarantee debt issued by warehouse lenders, making it easier for them to provide financing to mortgage banks.

When mortgage bankers complained about the lack of warehouse funding, officials in the Treasury and Federal Reserve urged them to seek help from the regulator of Fannie and Freddie.

Last September, the regulator took over management control of the two shareholder-owned companies as surging defaults depleted their thin layers of capital. They are now being propped up by funds from the Treasury. Under regulatory control, they have shifted their focus to the prevention of foreclosures, even though that may delay their return to profitability. The Treasury also has said that Fannie and Freddie may play a role in supporting state housing-finance agencies.

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Bloomberg News

Mortgage banks typically are small, family-owned companies. Unlike commercial banks or thrifts, they aren't licensed to take deposits and so don't have that source of money for their loans. Instead, they borrow money from warehouse lenders, which often are units of larger banking companies. The mortgage banks use the short-term credit to provide loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to investors such as Fannie or Freddie.

Until credit markets froze up in 2007, Wall Street investment banks and many large mortgage lenders were eager to provide these warehouse lines of credit. Now, many of those big institutions have stopped making warehouse loans or have cut back on that business. Warehouse Lending Project, a group of mortgage bankers seeking to revive the market, estimates overall money available for warehouse loans has dropped nearly 90% since 2006, to about $25 billion

Mr. Courson said he believes the regulator can give Fannie and Freddie temporary authority to help fund warehouse loans and that it won't be necessary to seek congressional approval for this expansion of the two companies' role. "We just don't have the luxury of time for going through the legislative meat grinder," he said.

Write to James R. Hagerty at bob.hagerty@wsj.com