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Investments

Guessing game on how far G-fee hikes will go

Almost five years after Fannie Mae and Freddie Mac’s conservatorship, many private market players are desperately searching for ways to encourage nonagency capital back into the market. 

And so does Ed DeMarco. The acting director of the Federal Housing Finance Agency is a supporter of this transition, and noted that the FHFA will continue to increase guarantee fees in 2013 in order to encourage private capital back into the market.

"A key motivation behind increasing g-fees was to bring the government-sponsored enterprises’ credit risk pricing closer to what would be required by private sector providers," he said in a speech this week.

DeMarco added, "However, the increase in guarantee fees is part of the contract framework; it is not designed primarily to increase the Enterprises’ revenue. The idea is that at some point the increase in guarantee fees will encourage private capital back into the market," he said.

While private capital hasn’t quite made its way back into the sector, DeMarco is confident that "we are getting closer."

However, no meetings have been set by the FHFA to discuss the amount of g-fee hikes or when the increases will occur during this year.

At the beginning of 2012, Congress authorized 10 basis points in g-fee hikes for the next 10 years as a way to fund the temporary reduction in payroll tactics.

In 2012, guarantee fees increased twice, bringing the average g-fee on new mortgages to 50 basis points, doubling what g-fees were prior to the conservatorship of Fannie Mae and Freddie Mac, DeMarco said.

Fitch Ratings believes that further increases in g-fees charged by Fannie Mae and Freddie Mac will prove to be an effective mechanism to offer the most promise in drawing private investors back into the market.

Additionally, Fitch noted that the effect of higher g-fees will be gradual and that it’s challenging to predict the level at which private execution will benefit the economy.

On a similar note, Compass Point believes the FHFA will continue to increase g-fees as a means of pricing the government guarantee. 

"This, in turn, will continue the slow march toward increasing pricing levels to the point where private capital will be enticed to return to the market," analysts at the research firm said.

Furthermore, Compass Point expects that the FHFA will mandate an increase of 20 basis points in g-fees two separate times in 2013.

"A more dramatic increase would focus unwanted attention on the FHFA’s efforts in the near-term and would break with the agency's methodical approach thus far," the research firm explained. 

Banking giants have also made their predictions about how much g-fees will increase this year.

For instance, JPMorgan Chase (JPM) projects an increase by at least 25 basis points in 2013 as a way to help bring private capital into the mortgage and reduce the GSEs market share of securitizations. 

On a similar note, Bank of America Merrill Lynch (BAC) posted a forecast for g-fee increases in 2013, with a bigger expectation that g-fees will rise by at least an additional 30 to 50 basis points to match recent private label execution.

cmlynski@housingwire.com

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