As the Federal Home Loan Bank System continues to aggressively market its red-hot Mortgage Partnership Finance (MPF) program nationwide - offering an unbeatable competitive advantage to lenders for the purchase of Federal Housing Administration (FHA) loans - the forthcoming entrance of mortgage-lending titans GMAC Mortgage Corp. and Countrywide Credit Industries into the MPF family has rattled some market players who question the longevity and viability of the program for the long-term.
More importantly, market participants predict that the participation of such bigshot players in MPF may exacerbate the already precarious market for Ginnie Mae securities.
It was recently announced by Countrywide chairman Angelo Mozilo that the company had relocated its charter reinsurance subsidiary from Vermont to a midwest location for the express purpose of gaining access to the Chicago FHLB's MPF program, which was founded by that bank in 1997. Similarly, in late April the Office of Thrift Supervision approved an application from GMAC to form a new thrift and to establish an operating subsidiary of the new thrift, with the main purpose of taking part in the attractive execution associated with MPF.
MPF officials confirm that they are currently in talks with other large originators as well. Norwest and Wells Fargo are already participating in the program.
"If our program will ever get to be a viable competitor to Fannie Mae, Freddie Mac or Ginnie Mae, it needs the involvement of all sectors of the mortgage market, which includes all types of originators," said David Feldhaus, who is in charge of the Chicago MPF program. "We have designed MPF products with different characteristics to meet the needs of all different types of lenders."
MPF II?
In addition to this, the Federal Home Loan Banks of Topeka, Indianapolis, Cincinatti and Seattle have recently set forth plans to create an MPF "spinoff" - called the Mortgage Purchase Program - that will be somewhat different than the original MPF program but will retain the same goal of creating more liquidity for FHA/Veterans Administration loans.
Though the long-term success of these programs remains to be seen, one thing is for certain: Ginnie Mae, a GSE that relies heavily on buying FHA loans to collateralize its securities, is going to bear the brunt of the MPF's rising popularity.
And now that large private-label lenders have entered into the mix, the threat to Ginnie Mae, sources say, is all the more palpable.
"With Ginnie Mae securities, mortgage bankers have to leave something on the table, such as a guaranty fee, whereas with MPF they pay you a fee to manage the credit risk," said Anand Bhattacharya, executive vice president of Countrywide capital markets. "For the larger players, it is an issue of execution. Instead of paying that six basis point guaranty fee, the FHLB is actually paying the originator three or four basis points to manage the credit risk.
"If an originator will sell into the secondary market, it behooves the originator to find the alternative that gives the best execution."
Even though the FHA loans are sold to the FHLB in the program, the originating institution retains servicing rights and even gets a servicing fee and other enhancements to manage the credit risk. Additionally, the loan is never on the balance sheet of the lender, so the prepayment risk belongs to the FHLB.
The payoff for lenders is so attractive, in fact, that lenders are going out of their way to create subsidiaries which may be eligible for FHLB membership.
Only insurance companies, commercial banks, thrifts and credit unions can become members of the FHLB system, and only members can partake in the MPF program. Since players such as Countrywide and GMAC are not depositories, they have to create a holding company or subsidiary that is one - and that is relatively easy task to do, sources say.
"Most dealers have created a de nouveau thrift for their trust and cash management products," said Michael Youngblood, managing director of real estate at Banc of America Securities. "If they can do it to serve their own high-income net worth customer base, then it is not inappropriate for a company like Countrywide to get a charter that might lead to a broadening of homeownership. Any company can seek out a thrift."
But even though the original MPF program was established to benefit the "small guy" player - small regional banks and thrifts that felt safe knowing that a local FHLB was knowledgable about the credit and interest-rate risks associated with lending - the impending entrance of big-time lenders can possibly mark a different direction for the program.
In one sense, this is a positive direction, because big players can only participate if they become members of the system, which means they must take an equity position in the regional bank or banks, and that position scales up with the dollar volume of the advances. The more a company like Countrywide participates, the more stock they would have to acquire and the greater the capitalization of the system.
"To the extent that this increases demand for FHA securities, it will lead to a lower cost of borrowing for the customer," noted Youngblood. "FHA borrowers are concentrated in urban areas, or from low and moderate income households. Even though the MPF program has an unfortunate effect on Ginnie Mae, it's having a fortunate effect on the homeownership and public-policy missions that the FHLB was chartered to fill. If the average guy gets a better deal out of it, I'm encouraged."
A Bottomless Pit?
Despite the positive ramifications, some players foresee the MPF program creating a battered Ginnie Mae market; other participants also question how long the program can go on buying a limitless amount of loans. Indeed, is the MPF program a bottomless pit?
"I guess [the FHLB] is saying that it's going to be a long-term program," said a source associated with the MPF program. "But it remains to be seen how aggressive they continue to be about it."
"In the near-term, it clearly means that a lot of the stuff that went into Ginnie Mae I and II's may end up in the MPF program," added Countrywide's Bhattacharya. "For Ginnie Mae, though, it doesn't matter where you are - you have the same level of execution. But for the MPF and the forthcoming new FHLB program, there may be a difference in pricing between people who can sell into the program and people who cannot."
With different pockets of demand in different areas, the nature of execution in the FHLB programs may not be same for everybody. In other words, whereas Ginnie Mae pricing is the same nationwide, the MPF-style programs may create a tiering in terms of the pricing of actual loans.
"There will be even weaker new issuance volume in Ginnie Maes," added Youngblood. "It will deprive Ginnie of anticipated revenues and undermine its ability to support HUD's mission and will inflate the value of Ginnie passthroughs relative to conventional ones."
Another market source noted that last week Ginnie Maes were already looking rich: they were 28 ticks over Fannie paper, "which is double than norm," the source said. Already, with the MPF program creating a further shortage of Ginnies, they will tend to tighten up compared to everything else.
Ginnie Mae did not return calls regarding this subject.
Still, the more important question on mortgage players' minds is whether the original mission of the MPF program will continue to be upheld once larger players get involved.
"The Federal Housing Finance Board likes the program, because it benefits the members of the system, and if those members benefit enough, that benefit is passed on to customers," said a source close to the FHLB. "But if Countrywide or other big players are profiting from this, they are less likely to pass on that benefit to mom and pop."
"We're talking to a number of mortgage lenders, large and small, about the program, and we're trying to build the program as fast as we can," concluded FHLB-Chicago's Feldhaus.
