The recent announcement by Freddie Mac that the GSE is considering raising its guarantee fees has given some ammunition to GSE opponents who consider this to be further evidence that the agencies' continuing expansion into lower-credit product carries increasing and unforeseen business risk.
Freddie Mac executive vice president Paul Peterson's recent statements - reflecting that fees would indeed increase if the GSE begins to see a continuing trend in deterioration of credit quality and lower credit scores - have led some market observers to wonder whether FM Watch might be correct in their suspicions that the GSEs are not as good at risk management as they claim to be.
Freddie's announcement also led observers to question whether Fannie Mae would eventually follow suit, as loan purchases with loan-to-value ratios greater than 90% seem to be increasing across the board.
"To me, the idea of Freddie Mac raising their guarantee fees hands the golden dagger to FM Watch, because this is exactly what they've been saying all along - that [the GSEs'] business is riskier than they've led on," said a veteran MBS player. "The fact that they might have to suddenly raise their guarantee fees...gives a ton of creedence to the opponents of the GSEs."
"This is a serious event that we're watching closely like everybody else to see if they are the risk managers they claim to be," added Mike House, executive director of FM Watch. "Our concern is that none of this has been tested in a down market, and even in an up market, if they're having some problems here, then everyone should take notice."
However, the GSEs assert that the fees charged at any given time are a reflection of providing the best business and lowest cost for consumers, and that, in fact, credit losses are at an all-time low. Moreover, fees are constantly evaluated on a daily basis, and take into account many different factors, including the state of the overall economy and where interest rates are.
"Anyone who is saying that these statements indicate that we are not doing our job of prudent risk management is grossly misinterpreting what Mr. Peterson said," said Brad German, a spokesman for Freddie Mac.
In point of fact, last year Freddie Mac had credit losses of $155 million, which as substantially lower than years past. Additionally, Fannie Mae spokeswoman Janice Daue said that delinquencies are the lowest they've ever been at her GSE.
"Guarantee fees are not something that is evaluated once a year - it is a very constant thing, and we are constantly looking at our overall book business and the relationship with our lenders," Daue said. "Everyday you're in the market, conditions change, and the whole entire economic environment is taken into consideration. We can't tell you what is going to happen six months from now."
Michael Youngblood, managing director of real estate at Banc of America Securities, echoed the sentiment: "Agencies are constantly tweaking fees up and down according to their perception of the market, credit trends, their own analytics and the like. It doesn't look like [increasing fees] is unreasonable or out of scope of their charter and I, for one, would be very reluctant to criticize this action."
Fee Increase to Boost MPF?
Still, with all of the scrutiny which the Fed has recently placed on the GSEs, the announcement was construed by some to indicate that the agencies might not be pricing themselves correctly in order to manage their risk.
"If I'm Alan Greenspan and I'm already concerned about the effects of these huge monstrosities and the leverage they have in the economy and all of a sudden I see this, now there is a larger issue here," said an MBS analyst.
"Their risk is slightly above Treasury risk, and guarantee fees are an average of 19 to 20 basis opints at this point. That is high," said another industry source that preferred to remain anonymous. "Over the last several years they have given up a lot of the wrap and warranty requirements to encourage use of automated underwriting systems...and have assumed more risk. Now they credit enhance already enhanced deals."
Additionally, some market participants point out that since lower guarantee fees give the Federal Home Loan Banks Mortgage Partnership Finance program an edge, Freddie's increase in fees may make the FHLB program more attractive.
"To the extent that Freddie Mac may increase the fees, it certainly makes the pricing more attractive to originators to go the other way, retain the servicing, and pay the fee at the Home Loan Banks," said Linda Lowell, senior vice president and head of research at Greenwich Capital Markets. "If fees go up on one side, it lowers the threshhold a little bit on the other side."
Still, Youngblood does not think that Freddie's announcement should be a cause of concern: "The announcement is not conclusive evidence that [Freddie] is engaging in riskier lending practices," he stated.