Dec142013

Fannie and Freddie G-Fees are increasing again

Just like FHA mortgage insurance premiums, Fannie and Freddie are also increasing their Guarantee Fee (G-fees).   They have been increasing since 2008, when the government purchased 79.90% ownership in each government sponsored enterprise.  The initial reason for increasing the G-fees was due to the cost of all those GSE-backed loans going into default.  In subsequent years there were other reasons for G-fee increases for example the mortgage tax (collected through the G-fees), and the stimulation of the private mortgage market.   If fact, Federal Government collects so much revenue it’s used to help fund the government during the sequester for an extra couple of days

FHFA Announces Increase in Guarantee Fees

The Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to raise their guarantee fees (g-fees).

The g-fee increase consists of three distinct components. First, the base g-fee—or ongoing g-fee—for all mortgages will increase by 10 basis points.

Second, the up-front g-fee grid will be updated to better align pricing with borrowers’ credit risk characteristics.

And third, the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by the two companies since 2008 is being eliminated except in four states identified as having foreclosure carrying costs that exceed the national average by more than two standard deviations. These states include: New York, Florida, New Jersey, and Connecticut.

Those four states have notoriously long foreclosure timelines.   FHFA now has decided to price in the additional risk into the G-fees for those four states.

Based on the GSEs’ loan purchases in Q3 2013, FHFAexpects the announced changes to the g-fee structure to produce an overall average g-fee increase of approximately 11 basis points, which represents an average increase of 14 basis points on a typical 30-year mortgage and 4 basis points on a 15-year mortgage.

A small increase but Fannie and Freddie own the mortgage market share under conforming rates limits.  Small increases for billions of dollars of loan underwriting per month equals a lot of money.  It’s very tempting to increase for politicians to increase the G-fees.

FHFA says these steps will help to contract Fannie Mae and Freddie Mac’s dominant presence in the marketplace gradually over time in an effort to entice private capital to re-enter the market.

True, but for the private mortgage market to come back QE and ZIRP needs to end.  There needs to be greater returns on investment for private capital to assume the dominate role in the mortgage market share

The GSEs’ conservator signaled in March that g-fees would continue to increase in 2013 in the interest of furthering FHFA’s strategic plan for the two mortgage financiers. The regulator has raised Fannie and Freddie’s g-fees twice already—first in December 2011 and then again in August 2012, both of which entailed a 10 basis-point increase.

“Today’s price changes improve the relationship between g-fees and risk,” commented Edward J. DeMarco, FHFA’s acting director. “The new pricing continues the gradual progression towards more market-based prices, closer to the pricing one might expect to see if mortgage credit risk was borne solely by private capital.”

I believe Ed DeMarco, but I also think he wanted to have a final say in the direction of the FHFA before Mel Watt was appointed.

With a nod to the American taxpayer for “providing the capital support that keeps these companies operating,” DeMarco added that the new structure better protects taxpayers by reducing their credit exposure and offers them greater returns, while encouraging private capital to return to the mortgage market as an eventual surrogate of the GSEs.

FHFA called the g-fee changes, including the updates to improve the pricing framework’s sensitivity to risk, “important steps to enabling Freddie Mac and Fannie Mae to deepen and broaden the risk-sharing transactions with private investors they initiated this year.” In the coming years, FHFA said it expects risk-sharing transactions to cover a growing portion of the GSEs’ new business and the amount of risk transferred to private capital to continue to increase.

If Fannie and Freddie really wanted to reduce risk to the tax payers they would required 20% down payments on all GSE sponsored loans. The 20% down payment requirement has been the most effective way to reduce the default risk on a loan.

For loans exchanged for mortgage-backed securities (MBS), the price changes go into effect starting April 1, 2014. For loans sold for cash, the price changes are effective March 1, 2014.

In spite their initial financial troubles Frannie and Freddie have been cash flow for the federal government.  Now, some of that cash flow is due to the manipulation of  mark to market accounting rules, but just like student loans there has been a net cash inflow for the Federal Government.  It’s for this reason I think Mel Watt will let new G-fee increase stand.

The revenue generated G-fee might ultimately lead to Fannie and Freddie losing market share and private lending take over the mortgage market.  The cash starved federal government is always looking for increased taxes (revenues) and it’s every easy just to increase  G-fee.  I believe this greed will increase and it push the G-fees too high and the private market might find away to originate mortgages for cheaper.  This has already occurred in the Jumbo loan market.  Jumbo has greater mortgage standards, however their overall mortgage rates are lower that government sponsored loans.  However, QE and ZIPR must also end to allow mortgage rates to increase so investors will feel more comfortable purchase these MBS products.

Finally, there will never a plan to have the private market take over Fannie and Freddie’s mortgage market.  The take over will just naturally occur will the G-fees are increased too much.
Mike