The Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. are acquiring a bigger share of their business from smaller players — a trend that presents risks.
In the past, Fannie Mae and Freddie Mac did much of their mortgage buying from large depository institutions.
These sellers purchased or originated home loans from smaller, independent lenders and sold them to the pair of government-sponsored enterprises.
That is according to Recent Trends in the Enterprises’ Purchases of Mortgages from Smaller Lenders and Nonbank Mortgage Companies from the Federal Housing Finance Agency Office of Inspector General.
But starting in 2011, a growing share of the GSEs’ business has been acquired from smaller lenders and non-bank mortgage companies.
“Smaller mortgage originators and nonbank mortgage companies have responded to the changing market by developing direct sales relationships with the enterprises, thereby increasing their market share,” the OIG said.
The shift is beneficial to Fannie and Freddie because it reduces highly concentrated financial exposure to their largest counterparties.
But it also increases exposure to other counterparty risks.
For instance, the smaller seller-servicers might have limited financial capacity. They also might be exempt from federal safety and soundness oversight.
Such a situation could increase the possibility of a default on financial obligations.
Another risk is the potential lack of sophisticated systems and expertise needed to manage a high volume of mortgage sales to the GSEs. These conditions increase the risk of loss for Fannie and Freddie.
The pair of secondary lenders additionally face an elevated risk of reputational harm. An example cited in the report was an institution that was sanctioned by state regulators for engaging in abusive lending practices.
While the Federal Housing Finance Agency conducted high-level examinations of the GSEs’ counterparty risk management controls and reviewed the risks associated with specialized mortgage servicers, the OIG found that the regulator didn’t test and validate the GSEs’ controls to address increased business from smaller and non-bank lenders.
But FHFA has scheduled several examinations of how Fannie and Freddie are managing this risk and intends to develop related guidance.
The OIG said it will monitor the effectiveness of FHFA’s efforts.
