The Federal Housing Finance Agency’s move to increase guarantee fees by 10 basis points on new Fannie Mae and Freddie Mac business has the Mortgage Bankers Association hitting the panic button.
But there’s no cause for alarm.
The long-expected move, designed to lure private capital back into the market and to remove the artificial subsidy that allows Fannie and Freddie to vastly undercut private investors, is not going over well with many who fear that the increase could scare away borrowers.
"What had been an exercise by regulators to systematically attract private capital into the mortgage market has now turned into an attempt to shock private capital back into the system," says David Stevens, president and CEO of the Mortgage Bankers Association. "The new up-front risk-based pricing grid means that fees will rise the most for borrowers in the heart of the home purchase market, those who have credit scores between 680 and 759 and who are putting down between 5 and 20 percent."
Fannie Mae and Freddie Mac announced the hike on Dec. 9, under the direction of the FHFA. The base g-fee, or ongoing g-fee, for all mortgages will increase by 10 basis points. This represents an average increase of 14 basis points on typical 30-year mortgages and 4 basis points on 15-year mortgages, according to the FHFA.
The hike will be implemented over the next 2-3 months. The changes come following the findings of the annual report from the FHFA. According to a Bank of America Merrill Lynch (BAC) analyst, g-fees could have risen by up to 50 points.
Stevens said the hike will compound challenges for homebuyers going into 2014.
"The timing of this could not be worse, especially with the Qualified Mortgage (QM) rule, which is already tightening credit, going into effect in January," he said.
The QM rule includes a host of new regulations mandated by the Consumer Finance Protection Board regarding qualified mortgages (QM).
Jeff Taylor with Digital Risk says, however, there is no cause for red flags and warning bells. At worst, he says, there may be a little short-term pain to bring back real market pricing, and it won’t just impact middle-income buyers.
"The hike affects all borrowers, but what (FHFA Acting Director Ed) DeMarco is trying to accomplish is a private capital comeback and there’s no sign of that right now," Taylor said. "This is not a surprise so it’s not a shock to the system."
He added that he doesn’t believe this will scare off buyers the way MBA believes it will.
"There may be a little impact but I don’t think a 10 basis point hike is going to be enough to drive someone away from buying a home. It’s not significant in the big picture, and a little pain now is going to save us a lifetime of problems," Taylor said.
After more private sources return to the market to compete on a fair playing field against Fannie and Freddie, the more competition will benefit borrowers.
Most importantly, Taylor said, having the government’s thumb on the scale in favor of Freddie and Fannie — as it is now — has long-term negative consequences.
"This pain is necessary because having 95% of mortgages backed by the federal government is just not sustainable," Taylor said.
FHFA’s mandate on guarantee fees is a three-prong approach: an increase in the base g-fee of 10 basis points, the removal of the 25 basis point adverse market fee (not applicable in NY, NJ, CT and FL), and a revision of the up-front risk-based pricing grid.
Within the LTV and credit score matrix, the most negatively impacted borrower pools are those that carry credit scores from 680-759 and put down 5-20%. This demographic will see an increase in financing costs of between 20-40 basis points. For perspective, based on public builder disclosures, the average down payment on conforming mortgages currently stands at roughly 15-20%, putting the impact to the average new homebuyer at the lower end of that effective range.