The always-important question of what Fannie Mae and Freddie Mac charge for loan guarantees is emerging as a central issue in the development of a stable housing finance market.
Guarantee fees — or "G-Fees" — is a perennially hot-button topic. But two recent government actions, and industry responses to them, show the issue is growing in relevance as policymakers debate the government-sponsored enterprises' future and the private-label market tries to relaunch.
A June Federal Housing Finance Agency paper on G-fees avoided a position on whether fees should be raised or lowered. But the paper is already eliciting concerns from the mortgage insurance industry. Meanwhile, many of the comments submitted to the Treasury Department on ways to revive private label securitization weighed in on how G-fees could affect the securitization market. Some suggested that higher G-fees could make Fannie and Freddie securities less attractive — thereby opening the door to more private-label activity — with others saying that changing the fee structure may not be sufficient.
"Policymakers should not assume that increases in G-fees alone will lead to a significant increase in PLS issuance," Christopher Killian, a managing director at the Securities Industry and Financial Markets Association, said in an Aug. 8 comment letter to Treasury.
The FHFA paper, released June 5, sought comment on several issues, including the method used by the agency to set G-fees and about the impact of fees on the housing finance market. Though the regulator shied from any specific recommendations, the release of the paper followed an earlier move by FHFA Director Mel Watt to suspend a plan proposed by his predecessor to raise fees another 10 basis points.
But in an Aug. 14 comment letter to the agency, the U.S. Mortgage Insurers expressed concerns about the FHFA's "request for input." The group said the agency should have made greater reference to the role mortgage insurance plays in reducing the GSEs' credit risk, which can offset higher GSE fees.
"It is apparent that the benefits of private mortgage insurance are not fully incorporated in the RFI framework," USMI said in its letter. "USMI strongly believes that, because MI reduces the risk of loss to the Enterprises, the G-fees charged for mortgages delivered by lenders with MI before the GSEs provide their guaranty should be commensurately reduced." (The comment period ends Sept. 8.)
Mortgage insurers' concerns come at a time when the FHFA is also considering rules to raise the capital standards of mortgage insurance companies. As a result of the housing bust, three of the private mortgage insurers were taken over by state regulators.
Meanwhile, Treasury's request for comment on reviving the PLS market asked questions ranging from what should be the appropriate role for new securitizations in a future housing finance market to what could be key obstacles to getting a PLS market off the ground.
But in some of the comments, it appears difficult to separate the issue of attracting more private capital into the mortgage market from that of G-fees.
The American Bankers Association told Treasury that G-fees should eventually be raised to assist in the development of the private mortgage market. But the trade group does not want FHFA to hike those fees anytime soon.
The ABA "believes the G-fees are too low — that the compensation being paid for what amounts to full government backing is simply not priced correctly," wrote Robert Davis, executive vice president of the group.
Davis added, the "ABA does not recommend to the FHFA that G-fees should be raised at this time but that increases should be undertaken as part of a holistic approach that has as its goal the return of private capital to the secondary market, the shrinkage of the government's role in that market and more compensation paid to the government for the risks it takes on." (The comment period on the Treasury request for input ended Aug. 8.)
Under former acting Director Edward DeMarco, the FHFA raised G-fees to address rising loan losses and to reduce GSE lending as a means to attracting more private capital into to the market.
But Killian, of SIFMA, said in his letter to Treasury that there may be other factors besides the level of G-fees — such as the GSEs' loan limits, which go up to $625,500 — that are holding back the securitization market.
"The playing field is still slanted against PLS issuance because GSE loan limits remain 'elevated' and the qualified mortgage rule provides an exemption for GSE-eligible loans," he wrote.
Yet it is still unclear how much the FHFA is interested in a new PLS market taking business away from Fannie and Freddie. After he suspended DeMarco's proposal to raise G-fees, Watt signaled in a major policy speech that he would put greater emphasis on making credit more accessible to potential borrowers and move away from policies seeking to reduce Fannie and Freddie's market presence. To date, he has also shown no interest in reducing GSE loan limits.
The slowdown in mortgage lending this year also has regulators more cautious about limiting the GSEs' reach.
"I don't think it's FHFA's role to contract the footprint of Fannie and Freddie," Watt said in the May 13 speech.
David Stevens, the president and chief executive of the Mortgage Bankers Association, said in an interview that the regulatory agencies "are keenly in tune to what is happening in the slowing housing market and access to credit concerns.
"In the short run, I don't expect much change in fees or loan amounts," Stevens said. (The MBA is opposed to raising G-fees.)
Watt has indicated he wants to ensure that private mortgage insurance companies can provide adequate credit loss protection for Fannie and Freddie during periods of financial distress. By statute, Fannie and Freddie must require borrowers to purchase MI when their loan-to-value ratio is greater than 80%.
However, the mortgage insurers contend the current guarantee-fee structure penalizes borrowers that can't afford a 20% down payment on a GSE single-family loan.
"It is critical that FHFA, in computing G-fees, correctly incorporates the impact of MI in reducing the Enterprises' estimated costs of providing a credit guarantee," the USMI wrote in its comment letter to the FHFA. "To do otherwise results in consumers being charged twice for the same risk reduction, which disadvantages low- and moderate-income and first-time homebuyers."