Fannie Mae announced two weeks ago that it would cancel the planned increase in its adverse market delivery fee. The hike would have taken effect Nov. 1.

The GSE's move is in line with Treasury Secretary Henry Paulson's mandate to boost the availability of mortgage credit, which includes looking into the guaranty fee structure of Fannie and its rival Freddie Mac. Keeping down agency fees is a way to ensure mortgages remain affordable.

In a report, Merrill Lynch analysts said that the overall impact of jacking up the fee would have been negligible. For them, the bigger question is what kind of changes might be in store for Fannie and Freddie's underwriting standards. The report mentions a few: further easing of g-fees; streamlined refinancing of underwater loans; and buyouts of delinquent loans.

As Merrill sees it, under the new GSE conservatorship, re-building capital by boosting g-fees in no longer a top priority for these firms.

"The key is to differentiate between the two - whether the GSEs charge higher guarantee fees as a straight-forward pricing decision or whether these agencies are just giving in to the pressure on them to loosen their underwriting standards," said Bert Ely, an independent banking consultant. "These are two separate issues."

Ely pointed out that the government is using both agencies as a dumping ground to buy up nonconforming private label ABS, basically using these firms as warehouse facilities alongside the Troubled Asset Relief Program (TARP), which forms part of the Economic Stabilization Act of 2008.

Merrill analysts said that the GSEs could technically remove the two hindrances to the ability of homeowners to refinance: the increase in agency guarantee fees and the rise in current LTVs resulting from the dip in home prices.

To bolster refinancings, Merrill said that Fannie and Freddie could easily lift these obstacles by charging weaker-credit borrowers lower guarantee fees and not requiring mortgage insurance on high-LTV or underwater loans.

But these moves would create its own set of losers. Namely, us.

"While this would help many marginal borrowers to reduce their monthly mortgage payment, it would likely result in a massive transfer of credit risk from the non-agency sector to the taxpayer," wrote Merrill analysts.

This is the crux of the issue. Now that the GSEs are under the gun to come to the aid of beleaguered homeowners, will they have to further expose themselves to troubled credits? After all, taxpayers should not be burdened with the wholesale bail-out of the entire non-agency sector.

There are still ways to still extend a helping hand without jeopardizing taxpayer dollars. For instance, Merrill Lynch said that the GSEs could avoid taking on new credit at under-priced levels by limiting any future guarantee fee and LTV breaks to current agency borrowers.

When Fannie announced it would be suspending the guarantee fee increase, the firm's CEO Herb Allison said: "The market has changed substantially since we announced this increase to our pricing in early August. We are evaluating all of our risk-management, underwriting guidelines, pricing and costs in light of these changing conditions. As we move forward, we will seek to balance our responsibility to provide the most market support possible with our obligation to protect the company and its many stakeholders, including taxpayers."

Let's hope that both Fannie and Freddie take these words to heart.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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