Freddie Mac is silently extending credit to nonbank mortgage servicers, a move that some industry groups believe will leave lenders at a disadvantage.
Nonbank mortgage servicers can now rely on Freddie Mac to extend them credit if homes loans are disrupted, allowing them access to essential cash.
However, financing could ultimately undermine competitors, which according to an article by Joe Light for Bloomberg, critics believe could create an unfair market advantage.
Freddie’s credit lines aim to support nonbanks’ mortgage-servicing operations, and have not been announced publicly, according to the article.
From the article:
To make sure they have sufficient liquidity, nonbanks often borrow money against their mortgage-servicing rights. Freddie is now getting into the business of providing nonbanks that kind of credit. Banks, in contrast, don’t often need such financing because they have deposits and other business lines to fall back on.
Freddie Chief Executive Officer Don Layton said in an interview last week that the credit will fill in gaps not served by the private market and that Freddie’s risk exposure won’t increase, since the company already is vulnerable when one of its servicers goes under. He said Freddie has closed one transaction so far and that it partnered with other lenders on the deal.
Industry trade groups fear that Freddie will create unfair market conditions by charging lower interest rates and target financing at the biggest servicers.
“Our major concerns are around the unleveling of the playing field, between large and small lenders,” said Michael Fratantoni, Mortgage Bankers Association chief economist.
But Freddie believes that the credit will fill in gaps not served by the private market, according to Freddie Mac CEO Don Layton.
“We’re not trying to undercut the private market,” Layton said. “If it works, you’ve got another lender in the marketplace.”
Fannie Mae explained it is not planning a similar offering, saying private markets are already providing sufficient financing in this area, according to the article.