The price wars between government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae continue to benefit borrowers heading into the fourth quarter, with each agency picking its spots to steal market share from the other.

Freddie Mac’s Capital Markets Execution (CME) program continues to win more converts. The fixed rates offered by the CME program were on par with Fannie Mae’s MBS pricing as of mid-September, with rates in the mid- to high-5 percent range for 10-year deals.

But on shorter-term loans, Fannie seems to have the advantage. While both GSEs are taking a tougher stance on shorter-term loans, underwriting conservatively and pricing widely, Fannie Mae is offering rates about 40 basis points (bps) inside of Freddie on five- and seven-year deals.

While Fannie Mae is seeing a lot of refinancing business, Freddie Mac seems to be winning more acquisition deals. Freddie Mac currently offers a more flexible approach to acquisitions than Fannie Mae, positioning the company to win more business as the transaction market slowly begins to pick up heading into the fourth quarter.

Freddie Mac is much more willing to consider two years of interest-only on a 10-year acquisition deal than Fannie Mae is, for example. And borrowers looking to acquire solid assets in bad markets may have better luck with Freddie Mac.

“Fannie paints weaker markets with a broader brush,” says Don King, head of agency lending at Boston-based CWCapital. “Freddie is looking at individual transactions and making a business decision, but Fannie is much more rigid: This is the underwriting box, and if it doesn’t fit, it doesn’t fit.”

Fannie Mae will consider entire states “pre-review” markets, but Freddie will pick certain metro areas within those states to offer market rates. For instance, CWCapital recently worked on an acquisition deal located in Atlanta, which both Fannie and Freddie consider to be a weak market. But the individual deal was outperforming the market significantly. So Freddie Mac offered to go up to 80 percent loan-to-value (LTV) on the deal, while Fannie said that if it’s in Atlanta, then it gets 65 percent LTV. And that’s that. 

Floating Away
Freddie’s Capped Adjustable Rate Mortgage (ARM) product continues to win more deals than Fannie Mae’s adjustable-rate offerings. “The Capped ARM product has consistently been a more attractive execution this year, and that’s still the case,” says Bill Hyman, executive managing director at New York-based Centerline Capital. “It’s primarily a question of rate.”

Rates on Freddie’s Capped ARM are about 80 bps lower than what Fannie is offering, as of mid-September. Part of the reason is that Freddie Mac uses its 30-day reference bills as the benchmark. Fannie Mae, on the other hand, uses LIBOR, which, at 25 bps, is about twice as high as Freddie’s 30-day notes.

The interest-rate hedge Freddie offers for its ARM product also contributes to the low rates. “The all-in spread that Freddie Mac can offer is tighter, and it has to do with how Freddie Mac is able to price the cost of providing the interest rate caps,” Hyman says.

Fannie Mae’s MBS program is offering lower rates on refinancings, by 5 bps or 10 bps for 10-year deals, in the high-5 percent range. But the GSEs, who have had the market to themselves for more than a year, are seeing increased competition from the Federal Housing Administration, whose Sec. 223(f) refinancing program is offering rates of 5.5 percent, as of mid-September.

And while the affordable housing goals for the GSEs are modest this year, Freddie Mac is getting serious about winning “affordable” or “workforce housing” deals in the fourth quarter. The company recently signaled to its lenders that, for the rest of 2009, it would give big price breaks for deals with a significant amount of units that meet its affordability requirements.