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 for the purchase of Federal Housing Authority loans - the forthcoming entrance of mortgage-lending titans GMAC Mortgage Corp. and Countrywide 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 has relocated its charter reinsurance subsidiary from Vermont to a location in the vicinity of the Chicago FHLB for the express purpose of gaining access to that bank's MPF program. 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 in talks with other larger originators as well.
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, which has surfaced recently as a strong competitor to Ginnie Mae. 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 a relatively easy task to do, sources say.
But even though the original MPF program was established in 1997 to benefit the "small guy" player - small regional banks and thrifts that felt safe knowing that a regional FHLB was knowledgeable about local credit and interest-rate risks - the impending entrance of big-time lenders can possibly mark a different direction for 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."
"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."
It seems that whether or not a company is a small or large originator, the terms of the MPF program are so attractive that it is worth creating either thrift or insurance subsidiaries to take part in it. 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.
In one sense, this is a positive, 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 Michael Youngblood, the managing director of real estate at Banc of America. "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?
In addition to this, the Federal Home Loan Banks of 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/VA loans.
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.
Ginnie Mae did not return calls regarding this subject.
"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," said 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."
"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.
But the more important question is whether the original mission of the MPF program will still 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," said FHLB-Chicago's Feldhaus.