The Federal Housing Finance Agency announced Thursday that it will be seeking industry input on the guarantee fees that Fannie Mae and Freddie Mac charge lenders.
In January, FHFA Director Mel Watt reversed a proposed increase on the g-fee, originally announced in December by then-acting director Ed DeMarco.
In Watt's first major policy speech, given last month at the Brookings Institution, he said that the FHFA would seek comments on g-fee increases. In that speech, he said, “As many of you know, I issued a directive to the Enterprises that they delay the guarantee fee increase announced in December of last year. In our request for input, we will pose a number of questions the agency is considering, and we solicit and encourage your feedback.”
On Thursday, the FHFA followed through on Watt’s comments and released its request for input on the g-fees. “FHFA’s Request for Input includes questions related to g-fee policy and implementation regarding the optimum level of g-fees required to protect taxpayers and implications for mortgage credit availability,” the agency said.
Earlier in the day, murmurs began to surface in the industry that the FHFA may be increasing g-fees. In the Structured Finance Research report “Securitized product snapshot” on Thursday, Markit analysts wrote, “FHFA is considering raising guarantee fees across the board, opening up the credit box to underserved borrowers, and subsidizing their guarantee fee with the increase of higher credit borrower’s fee.”
While the FHFA may be considering increasing the fees, it doesn’t appear that it’s going to happen today. That marks a significant change in tenor from December.
In December, DeMarco announced that the G-fees would gradually rise throughout 2014. At the time, the FHFA said that the base g-fee, or ongoing g-fee, for all mortgages would increase by 10 basis points. That would have represented an average increase of 14 basis points on typical 30-year mortgages and 4 basis points on 15-year mortgages.
The plan was also to eliminate the up-front 25 basis point adverse market fee assessed on all mortgages purchased by Freddie and Fannie.
“The new pricing continues the gradual progression towards more market-based prices, closer to the pricing one might expect to see if mortgage credit risk was borne solely by private capital," DeMarco said when the changes were originally announced. "The price changes provide better protection of and return to taxpayers, who are providing the capital support that keeps these companies operating."
The FHFA changed course in January when the agency announced that it would delay the g-fee raise “in order to give newly appointed FHFA Director Mel Watt time to review the changes.”
The FHFA also delayed the update to the g-fee grid and the elimination of the upfront 25 basis point adverse market fee. “The implications for mortgage credit availability and how these changes might interact with the new qualified mortgage standards could be significant,” Watt said at the time. “I want to fully understand these implications before deciding whether to move forward with any adjustments to g-fee pricing.”
When the FHFA delayed the g-fee raise, David Stevens, president and CEO of the Mortgage Bankers Association, said “We believe last week’s announcement, coupled with the release of the new grids, marks a significant shift in FHFA’s policy, moving from a gradual approach to attracting private capital to one designed to shock private capital back into the market. This is a dangerous and misguided approach.”
Now, Stevens and everyone else will have their chance to speak up about g-fees.
In the request for input, the FHFA seeks answers to 12 specific questions related to g-fees. Among those questions are:
Risk to the Enterprises increases if the proportion of higher-risk loans increases relative to the proportion of lower-risk loans. This change in mix can occur if lower-risk loans are retained on bank balance sheets instead of being sold to the Enterprises, if more higher-risk loans are sold to the Enterprises, or if the overall mix of originated loans changes. What alternatives, other than risk-based pricing, should be considered? What are the pros and cons of each alternative?
Currently, target return on capital and the amount of capital largely determine required g- fees. What factors should FHFA and the Enterprises consider in setting target return on capital and amount of capital required? How should the Enterprises allocate capital across risk buckets?
If the Enterprises continue to raise g-fees, will overall loan originations decrease? That is, will Enterprise loans decline without a commensurate increase in private capital?
Is it desirable for the Enterprises to charge higher g-fees on low credit score/high LTV loans if it causes these loans to be insured/securitized through FHA/Ginnie Mae rather than through the Enterprises?
Should risk-based pricing be uniform across the Enterprises or should each Enterprise manage its own pricing?
The FHFA says that input must be received within 60 days or no later than August 4, 2014.