The regulator for Fannie Mae and Freddie Mac on Monday directed the two housing finance giants to raise fees for all loans in an effort to bring private capital back into the mortgage market and better reflect the credit risks of borrowers.
The Federal Housing Finance Agency ordered Fannie and Freddie to increase charges known as guarantee fees, or g-fees, that are embedded in the cost of home loans to protect investors from losses.
The directive came as the Senate is expected Tuesday to vote on the nomination of Congressman Mel Watt, D-N.C., to be director of the FHFA, replacing the current acting Director Edward DeMarco.
"These changes should encourage further return of private capital to the mortgage market," DeMarco said. "The price changes provide better protection of and return to taxpayers, who are providing the capital support that keeps these companies operating."
Fannie and Freddie will adjust guarantee fees in three ways. The ongoing annual g-fee will increase 10 basis points for all mortgages loans backed by Fannie and Freddie. The one-time upfront g-fee will be updated to better align pricing with the credit risks of borrowers such as the credit score and loan-to-value ratios.
Finally, the upfront, 25-basis-point "adverse market fee" that has been assessed on all mortgages purchased by Fannie and Freddie since 2008 is being eliminated except in four states where foreclosure carrying costs are extraordinarily high, the FHFA said in a press release.
Borrowers in those four states—New York, New Jersey, Florida and Connecticut—will continue to pay the adverse market fee to compensate investors for higher foreclosure costs, though the agency will reevaluate the fee at least annually.
"Elimination of the across-the-board adverse market fee provides recognition that the nationwide stress in housing markets has eased," the FHFA said in a press release. "The experience with mortgage defaults in the past several years, however, has amply demonstrated that mortgage investors and guarantors have significantly greater costs carrying out foreclosures in the few states that stand apart from the rest of the country."
The price changes will become effective on March 1 for loans sold for cash and on April 1 for loans exchanged for mortgage-backed securities. Fannie and Freddie do not originate mortgages but rather package loans from banks and mortgage lenders into mortgage-backed securities that are sold to investors.
Last year, the FHFA set a goal of contracting Fannie and Freddie's dominant presence in the mortgage market and set expectations that g-fees would continue to increase. The FHFA previously announced g-fees increases of 10 basis points in December 2011 and in August 2012.
The g-fees have been used in the past as a political football, notably when they were raised last year to offset temporary reductions in federal payroll taxes. G-fees have become a huge profit generator, helping the government-sponsored enterprises repay the taxpayer bailout from 2008.
Tom Deutsch, executive director at the American Securitization Forum called the move a concrete step towards “levelling the extremely uneven playing field between government-backed and private label mortgage backed securities.”
But Deutsch said it was also important that Congress ensures that any increase in g-fees collected by the GSEs will stay within the mortgage finance system rather than be diverted to fund other projects by the U.S. government. “It is critical that Congress avoid using the GSEs as cash cows to fund their own pet projects outside of the mortgage finance system,” he said.