Freddie Mac, Fannie Mae fee dispute seen brewing

NEW YORK, March 5 Thu Mar 5, 2009 3:54pm EST

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NEW YORK, March 5 (Reuters) - Freddie Mac's elimination of significant fees to boost refinancings under President Barack Obama's housing plan may force major recalibrations in the $5 trillion mortgage bond market unless rival Fannie Mae follows suit, lenders and investors said.

Freddie Mac FRE.P on Wednesday followed the announcement of the Obama housing plan details by dropping fees that compensate for risks of low credit scores and little equity. By cutting fees, the government-controlled company can sharply increase the number of loans eligible under the Obama administration's refinancing initiative, analysts said.

But the larger Fannie Mae FNM.P surprised investors by opting against a similar move despite urging by major lenders who also advised Freddie Mac, an industry source said. Fannie now risks angering its lender partners whose customers would be left paying higher fees.

"I suspect Fannie Mae is moving very quickly to change their minds on this," said Garry Cipponeri, a senior vice president at Chase Home Finance in Iselin, New Jersey. Failure to follow Freddie Mac would be a public relations "disaster," he added.

In an e-mail, Brian Faith, a Fannie Mae spokesman, declined to comment.

Under government control since September, the two largest U.S. mortgage finance companies have been taking further steps to underpin the market with a nod toward U.S. policy against shareholder profit. But the different approaches on fees may suggest the rivalry between the two companies is still alive.

Freddie Mac cut the fees to "align" itself with the Obama program, which aims to help as many as five million borrowers lower loan rates, a Freddie spokesman said. The program will begin on April 1, and will help borrowers that have been unable to refinance because their home values have dropped.

Freddie Mac "delivery" fees eliminated for the program run as high as 2.75 percentage points to borrowers with high loan-to-value ratios and low credit scores.

To illustrate the disparity, a Fannie Mae-funded borrower with a 620 FICO score and 105 percent loan-to-value, combining first- and second-liens, would be charged 5.25 percentage points, he said. The same loan funded by Freddie Mac would face a 0.25 percent fee.

For loans supporting 6.5 percent MBS originated in 2006 and 2007, Freddie Mac's move could be boost refinancing incentives 0.5 to 0.7 percentage point, according to Barclays Capital.

Bonds issued by Freddie Mac, which would be hurt the most if refinancing quickened, underperformed on Wednesday. But the move was muted on Thursday amid expectations that Fannie Mae will remove its fees, market analysts said.

Lenders that sell most of their loans into Fannie Mae's MBS program will "scream loudly," said Chase's Cipponeri.

Steve Kuhn, partner and head of fixed-income trading at Pine River Capital Management in New York, said: "So far, there has been very little relative price movement which suggests most participants believe that ultimately there will be uniformity in the fees charged."

Investors have been placing bets that federal initiatives to spur refinancings, such as Federal Reserve purchases of MBS, would fall short of goals because of credit constraints. If refinancings soar, MBS paying high interest rates are more exposed to losses because principal prepayments occur at 100, or par, on bonds currently priced at 103-1/2 to 104-1/2.

If the prepayments are slower than expected, those bonds should rise in value. (Editing by Gary Crosse)

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