Higher fees charged by Fannie Mae and Freddie Mac to bring private capital back in the mortgage market might actually backfire by reducing borrower demand for home loans or by simply shifting the risk of losses to another government agency.
That's the conclusion of a report issued Tuesday morning by the inspector general of the Federal Housing Finance Agency, the conservator of Fannie and Freddie.
The report by the Office of Inspector General Steve Linick shines a light on the charges known as guarantee fees that are embedded in the cost of home loans backed by Fannie and Freddie to protect investors from potential losses. Guarantee fees became something of a political football last year when they were raised to help offset temporary reductions in federal payroll taxes.
But they have become a huge profit generator helping the government-sponsored enterprises repay the taxpayer bailout in 2008. Last year, Fannie and Freddie generated $12.5 billion in revenues from guarantee fees, which have nearly doubled since 2011 to between 50 and 55 basis points.
While no one disputes that g-fees were set too low during the last housing boom, when they averaged about 21 basis points from 2004 to 2007, it may be far too early to determine if raising them will encourage private capital will come back in.
The FHFA has said the intent of raising g-fees is to narrow the cost between what Fannie and Freddie charge lenders to deliver large volumes of loans and what private lenders would pay to package loans into private-label securitizations.
When Edward J. DeMarco, FHFA's acting director, announced guarantee fee pricing increases last year, he said the changes "will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital."
But the OIG report appears skeptical that private lenders will come back into the market, and indeed many bankers have said the same thing privately, arguing that private investors are unlikely to support the mortgage market without a government guarantee, or backstop, against potential losses.
"Significant guarantee fee increases, under some scenarios, could result in higher mortgage borrowing costs and dampen both consumer demand for housing and private sector interest in mortgage credit risk," the report states.