Fannie's and Freddie's new role: Warehouse lenders?

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In an effort to increase competition in the mortgage lending business, Fannie Mae and Freddie Mac may soon be helping small mortgage banks get the money they need so they can start making mortgages again, according to a report in The Wall Street Journal this morning. Small mortgage banks used to depend on warehouse loans from major Wall Street investment banks and other large mortgage lenders, but that market has dropped 90 percent since 2006 to about $25 billion.

Warehouse loans are critical to small mortgage banks. They use these loans to borrow money in the short term to fund mortgages until the mortgage is sold to an investor or bigger bank. Without this type of financing, small mortgage banks can't issue new mortgages. Such companies are usually small, family-owned operations that are not licensed to take deposits, so they depend on warehouse loans to get money to lend.

With interest rates low, millions of Americans are gearing up to refinance. New U.S. first-lien home mortgage loans are expected to total more than $2.7 trillion this year, an increase of 72 percent over 2008 levels, according to the Mortgage Bankers Association. But without warehouse loans, most of that business will go to the giant full-service banks like Bank of America (BAC) and Wells Fargo & Co (WFC), which don't need warehouse loans.

Why does that matter? Without competition from the small mortgage banks interest rates will still be higher than they should be and service will be slower. John Courson, chief executive officer of the MBA told The Wall Street Journal that his association plans to present aplan to the regulator of Fannie and Freddie in about a week.

A spokeswomen for the Federal Housing Finance Agency confirmed that it is looking into ways that Fannie and Freddie can help revive warehouse loans, according to the Journal. It's another example of how the two firms have been redirected to help foster government policy rather than focus on shareholder returns. The question is, can Fannie and Freddie take on the new role without congressional approval? Courson thinks yes. He told the Journal, "We just don't have the luxury of time for going through the legislative meat grinder."

The government took control of Fannie Mae and Freddie Mac last September as their losses mounted during the national foreclosure crisis. Most expect that the two companies will likely never return to private hands. Fannie and Freddie provide or guarantee about 50 percent of home mortgages in the U.S.

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask About Buying Foreclosures."
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