Slow, steady and measured is how the Securities Industry and Financial Markets Association thinks the Federal Housing Finance Agency should approach raising Freddie Mac and Fannie Mae guarantee fees.
SIFMA says that FHFA should expand the factors it considers in deciding when and how to raise g-fees, so that it protects taxpayers and the GSEs while not disrupting the market for GSE mortgage backed securities and still bringing in private label capital.
“We commend FHFA for seeking input from the industry on g-fees, and believe this is a thoughtful and measured approach to this important issue,” said Randy Snook, SIFMA executive vice president, business policies and practices.
“We encourage the FHFA to consider the broader context in which g-fees will be raised, and strike a balance that protects taxpayers from credit risk and ensures the availability of credit to mortgage borrowers without unduly raising costs,” Snook said. “Additionally, FHFA should consider the impact of any changes on liquidity in the market and incentives that might be created related to the choice of other funding channels such as private-label MBS or FHA.”
Snook says that policymakers should consider g-fees in conjunction with other policy levers available and the broader market context when attempting to encourage more private label mortgage-backed securities issuance.
Another point, Snook says, is that the increase in g-fees should not unduly impairing the availability or cost of credit to mortgage borrowers.
The former FHFA acting director in December planned a 10 basis point increase charged to borrowers with mid-range or below credit scores and who don’t meet down payment criteria.
Such an increase would have amounted to a roughly $4,000 increase in interest on a 30-year, $200,000 mortgage, or about $11.11 per month.
FHFA director Mel Watt, sworn into office in January, put that planned hike on hold. (Read the first and exclusive national profile and interview with Watt, and about his plans at the FHFA, in HousingWire magazine. Subscription required.)
The issue of what Watt does with g-fees is one of the slew of issues that Watt has on his plate to take care of before the year is over, notes Mortgage Bankers Association President and CEO David Stevens.
The FHFA is taking comments from the industry to seek guidance on the issue.
“Mel Watt has a massive quantity of issues on his plate – g-fees, affordable housing goals, finalizing the score card, single family securitization, the PMI counterpart master servicing agreement, all of which has a massive impact on housing,” Stevens said. “The question is if he has the resources to get all of that done. If he moves to quickly it could hurt the housing industry as much as not moving fast enough.”
SIFMA says it wants to ensure that the policy on g-fees addresses capital requirements imposed on the GSEs.
“The capital regime imposed on the GSEs should be sufficient to protect taxpayers from losses and preserve the ability of GSEs to operate in times of stress. SIFMA believes that FHFA should target a range of capital requirements instead of a specific level of capital, and that an appropriate capital range may fall between 4-8%,” Snook said. “Return on Capital assumptions should similarly be flexible and vary within a range reflecting a full economic cycle. ROC assumptions should be directly linked to the risk guaranteed by the GSEs, whereby riskier underwriting would imply higher ROC requirements and vice versa.”
Snook added that the FHFA should base stress testing on the Federal Reserve Board’s Comprehensive Capital Analysis and Review to better align the GSEs to bank-like standards and practices. Maintaining capital above the regulatory minimum level would signal to the markets the robustness and soundness of the GSEs. Buffers could be built in over time as a component of, or in addition to, the g-fee.
Most important to those who recognize how critical it is to get private capital back into the space, SIFMA says the FHFA should consider the level of g-fees in conjunction with other policy levers and broader issues in the PLS markets when considering what the broader impacts of g-fee changes may be. As securitization through the GSEs becomes more expensive, PLS is just one alternative; funding from bank portfolios and FHA programs also will be relevant comparisons for lenders.
“A number of factors contribute to increases in PLS activity not being assured from g-fee increases, such as: uncertainty surrounding the future of the mortgage market, incomplete regulatory rules, and differences in views among investors, issuers and other market participants on the framework for PLS issuance that must be resolved,” Snook said.