Before the accounting scandals Freddie Mac was considered more averse than Fannie Mae to taking credit risk and less enthusiastic about increasing homeownership.
But today the opposite seems true. Last week brought more evidence that under new management the two government-sponsored enterprises are swapping their traditional roles. Freddie signaled a bigger appetite for adjustable-rate mortgages that allow negative amortization, while Fannie kept talking about caution.
In an interview Friday, Jef Kinney, Fannie's vice president for business and product development in single-family, said it is worried that consumers are taking riskier loans on the assumption that home prices will keep rising.
Fannie's leadership role in the housing markets means it does not want to enable such risk taking, he said, even though such conservatism is causing both GSEs to lose market share to private-label securitizers.
"Sometimes that leadership is not defined by pure volume, but defined by standards," Mr. Kinney said. "Sometimes leadership is not doing something," he added later.
Freddie's plan to buy more option ARMs emerged Thursday. The product has affordable minimum payments, but some believe it could cause problems if short-term rates continued to rise and housing prices stumbled.
In an interview, James Cotton, Freddie's vice president of single-family marketing, said that this year it would buy option ARMs in bulk from a larger group of lenders than it does now and turn them into a standard product next year.
Freddie is working on the underwriting guidelines for a standard product, Mr. Cotton said. "Obviously it's going to have more limited parameters than a more typical ARM would have." Borrowers want negative amortization "as an option, but they don't tend to use it as much as people fear," he said.
Mr. Kinney said that Fannie buys some option ARMs already, but that its lenders are not clamoring for it to make them a standard product. "I guess I would say that the option ARM would have some of the same issues as the interest-only product," Mr. Kinney said. Not all products are "appropriate for all borrowers."
Also Thursday, in his first conference call with analysts after removing the "interim" from his chief executive title, Fannie's Daniel H. Mudd stressed a need to continue "adhering to our risk disciplines very tightly" in an environment where "we do not like the layering of risk that we see in some of the consumer products."
There is "credit risk out there that we're not entirely comfortable with," he said.
"We're tightly balancing the need to serve our customers with the need to ensure that our book is as creditworthy as it's always been," Mr. Mudd said. This approach may hurt growth or returns, he acknowledged, "but we do think it's in the best long-term interest of managing the business."
"So, no changes to announce on the risk-discipline front," he said. Later, he said that when it comes to the private-label securitizers, "we're standing back from that market. … I think we have a role to play when either the market takes a different view or when some of those securities have issues."
Shortly after taking over Freddie in late 2003, chairman Richard Syron promised to soften its risk-averse culture to create more affordable housing. In an interview last year, he said that when it comes to the "trade-offs between mission and risk," it would not be afraid to "take more risk on the margins."
By most accounts, Freddie has followed through. Last month its president, Eugene M. McQuade, talked about needing to keep up with product innovations by originators - innovations that worry some analysts and observers.
Mr. Mudd made noises similar to Mr. Syron's about needing to make Fannie's mission more central to its business. And Mr. Kinney acknowledged that part of Fannie's "American Dream Commitment" - a 10-year plan announced in 2000 - is about increasing homeownership.
But "an equally large part is about keeping people in their homes," he said. Meeting regulatory affordable-housing goals in such an environment is "not an easy balancing act."
Mr. Kinney said no particular product is the problem. Rather it is the combination of risks on the same loans and underpricing for them. "There are points at which we say, 'Enough is enough.' There are a lot of dynamics that go into that, so it's hard to say, 'Here's a line in the sand.'"
April was the first month in several years in which Freddie's purchases of mortgage assets outstripped Fannie's. One reason is that Fannie is shrinking its portfolio to build a 30% capital surplus mandated by its regulator.
Fannie remains the securitization leader but has continued to lose share to Freddie in that area this year. Both GSEs continue to lose share to the private-label market.
Amy Brandt, the president and chief executive of General Electric Co.'s WMC Mortgage Corp., said adopting "interest-only and other payment-focused products" early is a big reason for the private-label market's growth. But the GSEs seem to be "starting to get on that bandwagon."
Option ARMs have become increasingly popular. Countrywide Financial Corp. has said that 18% of its volume last quarter was option ARMs.
Mr. Cotton said data from one large portfolio of option ARMs over 10 years shows that only about 30% of borrowers in any given month failed to make payments that would fully amortize their loans over 30 years. For now, Freddie's bulk option ARM purchases will go into REMICs, not standard pass-through securities, he said.
Some analysts and lenders call the negative-amortization feature less risky than the potentially massive payment shocks embedded in interest-only hybrid ARMs.
"Giving the borrower that ability to pay the lower amount is going to wind up making this product safer than a 30-year fixed-rate product," said Ed Groshans, an analyst with Fox-Pitt, Kelton Inc.
Brad German, a spokesman for Freddie, said its "ramping up of high-touch servicing" guidelines can "open the door to some of the new products." For instance, in its Home Possible suite of affordable loans introduced this year, Freddie requires servicers to contact borrowers 10 days after delinquency. (Mr. Syron has also talked about laying off credit risk in the capital markets.)
Observers caution that any apparent difference between strategies from the outside may be misleading, and that it might take years to figure out what Fannie and Freddie are really doing.
Nearly two years after its accounting scandal, Freddie should be better at adjusting to the market changes, they said. Only in December did Fannie oust former CEO Franklin Raines, and Mr. Mudd said that it was just starting its search for new chief financial and risk officers - that interviews might start today.
Fannie has not stayed completely on the sidelines. It has launched a standard 40-year mortgage (which spreads amortization over a longer period, making it similar to interest-only loans), and next month it will update its affordable-lending suite by requiring less mortgage insurance coverage and making other borrower-friendly changes.
"In two years we're able to look back and we'll have history," Mr. Kinney said.
