U.S. looks for ways to free up mortgage finance

WASHINGTON, March 30 (Reuters) - U.S. officials are considering ways the government could step in to ensure small mortgage lenders have the financing they need to extend loans now that their credit lines with big banks have dried up.

At issue are the financing channels normally open to specialty mortgage lenders that deal directly with homebuyers. Without a deposit base of their own, these lenders typically rely on financing from investors or larger national banks.

However, big banks have shunned these erstwhile partners since the U.S. housing market collapsed, leaving mortgage rates higher than they might otherwise be.

Industry leaders want to enlist government-controlled finance companies Fannie Mae FNM.P and Freddie Mac FRE.P to help clear the blockage and the companies' regulator, the Federal Housing Finance Agency, is open to the idea.

FHFA said last week that it had "met with a number of industry participants and others to try to develop solutions."

Under one scenario, the two government-controlled mortgage companies would backstop the loans that stretch between the time a home loan is written and the time the mortgage banker can offload it to an investor.

Other options include having the Treasury Department tap its financial rescue fund to insure financing or having government mortgage agency Ginnie Mae expand credits to mortgage bankers, industry advocates say.

"We have been exploring with Treasury whether there is a potential to provide some sort of guarantee," John Courson, the head of the Mortgage Bankers Association, told Reuters.

CHANGING FORTUNES

During the housing boom, mortgage bankers were flush with cash as Wall Street bankrolled their operations and investors snapped up all the loans that they could offer.

Bank credit lines to specialty mortgage lenders had swelled to $200 billion by 2007, according to the MBA. Today, they have dwindled to about $20 billion.

Unclogging these credit lines might allow mortgage bankers to offer cheaper loans that would entice prospective homebuyers and help current homeowners refinance for a lower rate.

"If we could return to our normal capacity, I'd hazard a guess that it would translate to consumers paying three-quarters (of a percentage point) less on their interest rate," said John Johnson, president of MortgageAmerica Inc, a niche mortgage lender in Birmingham, Alabama.

This could be a big boon for prospective buyers or homeowners looking to refinance. Last week, the U.S. 30-year, fixed-rate mortgages averaged 4.85 percent, the lowest since Freddie Mac began tracking rates in 1971.

Some large banks say it made sense to curtail some credit lines in the face of an uncertain economy and sinking home values, but realty groups are pushing officials to help open the old funding spigots.

The National Realtors Association on Monday said that big banks appear to be cutting credit in order to expand profits.

"(Large institutions) appear to be using their pricing and market power to limit the flow of mortgage capital," the real estate trade group wrote in a letter to officials.

Banks' aversion to the wobbly housing market is just one reason for the credit curtailment. Such lending programs also leave a heavy mark on regulators' scorecards.

"Capital, as we all know, is incredibly dear to these financial firms. When you have an asset that you are going to put on your balance sheet that carries a 100 percent risk weighing, it gives you pause," said MBA chief Courson.

If warehouse loans were to win a government guarantee, their credit weight would decline, making them less of a burden to banks. (Editing by Andrea Ricci)