In what could spell a sweeping realignment of the home loan industry, a number of big lenders are looking to team up with either Fannie Mae or Freddie Mac rather than sell loans to both companies.
Bank of America's mortgage unit has agreed to sell the bulk of its new mortgages to Freddie Mac, the companies confirmed Friday. In March, Norwest Mortgage forged a similar pact with the McLean, Va., secondary market titan. And some industry experts predict that all of the top 10 originators will have signed similar deals with Fannie or Freddie by midsummer.
Traditionally, mortgage lenders have divided their business between the two agencies on the basis of prices and other considerations at the time loans are originated.
Changing technology is behind the new wave of dealmaking. Lenders, in exchange for promising large chunks of their business to one agency or another, are winning control over the technology used for reviewing loan applications.
The emerging partnerships could alter the competition between Freddie Mac and the larger Fannie Mae. In addition, the deals could ease tensions that have been mounting between lenders and the secondary-market giants over technology and other issues.
The next deal, according to one source, could be between Chase Manhattan Corp.'s mortgage unit and Fannie. A Fannie Mae spokesman said the company has a policy against announcing deals with individual lenders, and a Chase spokesman declined to comment.
In Freddie's deal with Bank of America, the bank will use its own automated underwriting system to approve loans originated in its retail branches but Freddie's Loan Prospector system for loans it buys from brokers and correspondents.
That differs from Freddie's arrangement with Norwest, in which the Des Moines-based unit of Wells Fargo & Co. uses its own automated underwriting system, not Loan Prospector, to approve conventional loans from all its origination channels. Norwest and Freddie also share credit risk data.
Unlike the Norwest arrangement, Bank of America's deal with Freddie is not exclusive, spokeswomen for Freddie and Bank of America said. But the Freddie spokeswoman said the deal covers "the vast majority" of the loans.
Bank of America originated $62 billion of mortgages in 1998, making it the nation's fourth-largest originator.
The Bank of America spokeswoman added that the bank has "always enjoyed an excellent relationship with both Freddie Mac and Fannie Mae and look(s) forward to strong relations with both in the future."
Some believe that the willingness to craft such deals, in which the government-sponsored enterprises are allowing the lenders to use their own underwriting systems, may dilute the efforts of the Competitive Consumer Lending Coalition, a financial services coalition led by Gerald L. Friedman. The coalition is focused on preventing Fannie and Freddie from expanding their lines of business beyond the secondary market.
The movement toward open architecture, whereby the choice of an automated underwriting system does not dictate where the loans are sold, is "very positive for the industry," said Saiyid T. Naqvi, president and CEO of PNC Mortgage Corp. of America, Vernon Hills, Ill.
"The more systems that are out there, the more innovation will take place on the credit side," he said.
Nearly three years ago, PNC chose to use Freddie Mac's automated underwriting system, Mr. Naqvi said. "We have really been selling most of our production to Freddie Mac," he said.
But Mr. Naqvi said Franklin D. Raines, chairman and CEO of Fannie Mae, has brought a "fresh approach" to Fannie Mae with a "much better, balanced approach to technology."
"Fannie Mae has been very open now to look at our loans, even though they are not on DU, and I think that is a very positive step," he said. "We really like to be able to sell to both" Fannie and Freddie, he added.
Some smaller and midsize lenders dismissed the argument that the deals between big lenders and the GSEs will leave them out of the picture.
"I think there is no question that Freddie Mac and Fannie Mae will have to consider extending those same type of arrangements to other lenders as well," said Patrick S. Flood, president of HomeBanc Mortgage Corp. in Atlanta.
Mr. Flood said the two GSEs are engaged in a "battle" to protect and gain market share. "A grand majority of this activity is based on profitability issues," he said, noting the pressure on these two public companies to continue to grow earnings.
The Freddie Mac alliance with Norwest Mortgage "shifted a very meaningful piece of the market," with Freddie gaining an additional $30 billion in loan sales, said Jonathan E. Gray, an analyst with Sanford C. Bernstein & Co. Meanwhile at Fannie's investor and analyst conference, Mr. Raines said Fannie would seek to boost its share of the single-family mortgage market to 28% in the next five years.
Freddie's actions constituted "a bid to alter where the market-share lines are drawn," Mr. Gray said. Now with the Bank of America deal, Freddie may gain up to an additional 3 points of market share of originations, he estimated. That would give Freddie essential parity with Fannie, he said.
