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

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.