Competition for business among Fannie Mae lenders is heating up now that Wachovia, GMAC Commercial Mortgage Corp. and other large financial institutions have begun to enter the low-interest loan program in an effort to boost origination volumes. GMAC, which didn't become a major DUS lender until 2001, and Wachovia, which is finalizing the purchase of two delegated underwriting and servicing (DUS) lenders, are poised to challenge the perennial Fannie Mae lending powerhouses.

“The trend of larger financial institutions buying DUS lenders is going to continue,” says Peter Donovan, CEO of Boston-based Berkshire Mortgage Finance, the No. 1 DUS lender in 2002. As a result, a power shift is taking shape among DUS lenders, the group of 27 financial institutions authorized to originate Fannie Mae loans.

Horsham, Pa.-based GMAC is projecting $3 billion in Fannie Mae originations in 2004, which places the company in a position to threaten Fannie Mae lending leaders Berkshire Mortgage and Calabasas Hills, Calif.-based ARCS Commercial Mortgage Co. (see chart). Wachovia is expected to complete the acquisition of DUS lenders Lend Lease Mortgage Capital and AMI Capital Inc. by the end of the fourth quarter. Meanwhile, New York-based Credit Suisse First Boston is in the process of finalizing the purchase of New Orleans-based Investment Property Mortgage. Already, Washington Mutual and Prudential Mortgage Capital Co. are among the top five DUS lenders after bolstering their DUS lending programs in the past few years.

The new players aren't participating in the DUS business solely to increase lending volumes. They also view the program as an opportunity to provide customers more comprehensive financing packages. For instance, Charlotte, N.C.-based Wachovia will be able to offer its customers construction and mezzanine loans that, upon stabilization, convert into lower-interest Fannie Mae loans. Because Fannie Mae is a government-sponsored enterprise, DUS lenders can provide loans with lower interest rates than competitors.

“It would be crazy for us to ignore what is clearly a very strong financial vehicle [Fannie Mae],” says Bill Green, a managing director of real estate capital markets at Wachovia. “We want to provide more capital options.”

The 10 biggest DUS lenders already account for about 70% of Fannie Mae loan production, says Donovan, and two new capital requirements may make it tougher for smaller lenders to compete. Responding to heightened Congressional scrutiny of its finances, on Jan. 1 Fannie Mae will increase the amount that private lenders must hold in reserve from 45 basis points per loan to 70 basis points per loan, says Donovan, who served on the Fannie Mae committee that adopted the rule. Lenders will have four years to raise the additional 25 basis points, or $25,000 on a $10 million loan.

At the same time, a new risk-sharing formula for institutional lenders — financial institutions that are state or federally regulated — will make it more affordable for these financial institutions to participate in the DUS program. Under the risk-sharing formula Fannie Mae approved earlier this year, institutional investors are required to set aside 150 basis points, or 1.5%, of each loan, compared with 400 basis points, or 4% of the total loan, which was the amount formerly required under federal law.

Despite the entrance of several new lending giants to the DUS business, veteran players in the Fannie Mae program are playing down the competitive threat. Howard Levine, president and CEO of ARCS, contends that big lenders are at a disadvantage. “Frankly, I'm not at all concerned about the large financial institutions putting the sophisticated mortgage bankers out of business,” says Levine. “The culture at large financial institutions typically is much slower, the process is slower and the decision-making is slower.”