Freddie Mac has quietly started extending credit to nonbanksthat issue mortgages, a move it says will help the companiesmaintain access to a crucial stockpile of cash if their home loansgo sour.

But critics say the financing could create an unfair marketadvantage that allows preferred lenders to muscle outcompetitors.

The new Freddie credit lines, which haven't been publiclyannounced, are meant to support nonbanks' mortgage-servicingoperations. That's the lucrative business of managing a home loanafter it's been issued.

Although banks dominated mortgage lending immediately after the2008 financial crisis, now they are facing stiff competition fromcompanies such as Quicken Loans, Freedom Mortgage, LoanDepot andCaliber Home Loans. Nonbanks issued nearly half of mortgages soldto Fannie Mae and Freddie in 2016, compared with 8% a decadeago.
The industry typically functions like this: A lender makes amortgage and then Fannie or Freddie packages it with other loansinto securities that are sold to third-party investors. The lendercontinues to make a steady stream of income for collecting monthlypayments from borrowers and sending the payments on to thethird-party investors.

Things can turn problematic for a mortgage servicer if aborrower defaults. The servicer is still obligated to keep sendingmonthly payments to the mortgage investors even though it's nolonger collecting any money from the borrower. Eventually, Fannieor Freddie reimburses the servicer. But in the meantime, there canbe a serious cash crunch.

To make sure they have sufficient liquidity, nonbanks oftenborrow money against their mortgage-servicing rights. Freddie isnow getting into the business of providing nonbanks that kind ofcredit. Banks, in contrast, don't often need such financing becausethey have deposits and other business lines to fall back on.

Freddie Chief Executive Officer Don Layton said in an interviewlast week that the credit will fill in gaps not served by theprivate market and that Freddie's risk exposure won't increase,since the company already is vulnerable when one of its servicersgoes under. He said Freddie has closed one transaction so far andthat it partnered with other lenders on the deal.

“We're not trying to undercut the private market,” Layton said.“If it works, you've got another lender in the marketplace.”
The move is causing angst among some industry trade groups that sayFreddie will target its financing at the biggest servicers. Thegroups also predict Freddie will charge comparatively low interestrates, putting small servicers at a disadvantage.

Officials with the Mortgage Bankers Association, the largestmortgage trade group, say they and their members haven't been toldwho's eligible for the credit lines.

“There's been no transparency about this,” said MBA chiefeconomist Michael Fratantoni. “Our major concerns are around theunleveling of the playing field” between large and small lenders,he said.

Ed Wallace, executive director for the Community MortgageLenders of America, said he's worried a program not available tosmall companies could “play into the national lenders'hands.”
Some regulators have said they're becoming increasingly concernedthat nonbanks might fare badly in a downturn.

Last month, authors from the Federal Reserve and the Universityof California at Berkeley's Haas School of Business wrote that thenonbank sector “in aggregate appears to have minimal resources tobring to bear in a stress scenario.”

Nancy Wallace, a Berkeley professor and one of the paper'sauthors, said nonbanks are undercapitalized and rely too much onborrowed money. Being able to access credit lines from Freddie orFannie wouldn't solve that problem, she said.

“Fannie and Freddie should not be in the business of that kindof lending,” Wallace said.

The Federal Housing Finance Agency, which regulates Fannie andFreddie, approved Freddie's request to provide financing tononbanks. In its list of 2018 goals for the companies, the FHFAsaid they should find ways to support mortgage-servicingliquidity.
Renee Schultz, Fannie's senior vice president for capital markets,said Fannie is not planning a similar program to Freddie.

“We think there's plenty of private capital out there forfinancing of servicing rights,” Schultz said.

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