Freddie Mac Takes Steps to Grow Single-Family Business
On November 6, National Mortgage News released an article titled Freddie CEO Puts the Focus on Boosting Single-Family Business.
Freddie CEO Puts the Focus on Boosting Single-Family Business
WASHINGTON — Freddie Mac is growing its single-family business and taking market share from its fellow government-sponsored enterprise Fannie Mae.
Freddie’s market share jumped to 41% so far this year, up from 35% in 2012, according to Freddie chief executive Donald Layton.
“Our work to become a more competitive company is bearing fruit in increased customer satisfaction and market share between the GSEs,” Layton said in releasing Freddie’s third quarter results Thursday morning.
Freddie purchased $77 billion in single-family loans from lenders in the third quarter, up from $59 billion in the second quarter and $49 billion in the first.
Layton noted that Freddie wants to enter the condominium market, which is a source of affordable housing for first-time buyers. He also said that Freddie is hiring more account executives to solicit business from mid-size and small lenders.
“We have cut in half the time it takes to board new lenders,” he said during a conference call with reporters.
Freddie’s multifamily business outperformed its single-family business during the third quarter, a concern since it is just a fraction of the size of Freddie’s single-family portfolio.
Freddie reported $200 million in comprehensive income from its single-family guarantee business in the third quarter, compared to $300 million from its multifamily business, which financed $14 billion worth of loans.
“In the long run, single-family should be more profitable than multifamily just by its size,” Layton said in an interview.
The single-family business continues to under-perform because of Freddie’s legacy books of loans that were originated during the 2005 to 2008 period.
These legacy loans compromise 14% of Freddie’s $1.7 trillion single-family guarantee portfolio, but represent 83% of credit losses during the first nine months of this year.
Freddie’s newer post-2008 books of business makes up 58% of the single-family portfolio yet represents just 2% of credit losses.
The enterprise maintains a $22.5 billion allowance for loan losses against its single family portfolio, compared to $81 million for its multifamily portfolio.
As older loans with lower guarantee fees run off and are replaced with new loans, “the single-family business will become more profitable,” Layton said.
The multifamily is also more profitable because Freddie has more flexibility in setting guarantee fees.
Freddie currently charges a 57.2 basis point guarantee fee on its single-family loans, which have a 2% serious delinquency rate. The multifamily portfolio has a 3 basis point delinquency rate, allowing Freddie to charge a 30.8 basis point guarantee fee.
Pricing on the multifamily side is not “overly controlled by the government,” Layton said, and Freddie is competing with banks in the marketplace.
The multifamily business “earns a normal return,” the CEO said, whereas the guarantee fees on single-family business are dictated by the Federal Housing Finance Agency. FHFA Director Mel Watt is currently reviewing the single-family G-fee structure.
Freddie’s earnings are also affected by the difference in pricing between Fannie and Freddie’s mortgage-backed securities. Investors pay a premium for Fannie MBS. To make up for this difference, Freddie pays its lenders more for their loans. In 2013, Freddie paid an estimated $650 million to lenders to ensure they receive nearly the same price as Fannie pays for loans.
Freddie calls this practice “market adjusted pricing” and Layton doesn’t see that drag on earnings lifting for another few more years.
“We do things to minimize them, but the ultimate solution is the FHFA’s proposals to create a single security,” the CEO said.
Creating this single Fannie and Freddie security is considered a “multi-year” project by the GSE regulator.
Overall, Freddie reported $2.8 billion in comprehensive income for the third quarter, up from $1.9 billion from their prior quarter. Most of the GSE’s earnings come from its $413.6 billion mortgage investment portfolio.
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