The Mortgage Bankers Association has responded to request for input from Fannie Mae and Freddie Mac on proposed raises in g-fees and loan-level price adjustments, saying it opposes increases in either.
The MBA’s position is that g-fees should be set to cover expected losses and general operating expenses, and should deliver an appropriate risk-adjusted return on capital.
Back on December 9, 2013, the GSEs announced proposed increases to g-fees and LLPAs. On January 8, 2014, Melvin Watt, the newly sworn-in director for the Federal Housing Administration, suspended implementation of these pricing increases pending further review and analysis. The Request for Input is part of that further review and diligence process.
Credit pricing includes on-going g-fees and LLPAs, which are paid at the time the loan is delivered to the GSE. LLPAs vary based upon loan terms including credit scores and LTVs. g-fees and LLPAs are charged to lenders in return for providing a credit guarantee to ensure the timely payment of principal and interest to investors in mortgage-backed securities. The cost of credit pricing is ultimately borne by borrowers as part of their up-front closing costs and/or as part of the ongoing interest payments.
The MBA says that it is important that the GSEs recognize that the robust underwriting requirements under the Ability-to-Repay rule will ensure that sound underwriting remains the rule, not the exception.
In this way, MBA’s leadership says, the GSEs should be mindful of the risks of a national downturn in housing but be aware that the loans they are purchasing or guaranteeing today and in the future will be significantly safer than those acquired prior to the financial crisis.
“(The) MBA strongly opposes any further, arbitrary increases in g-fees or LLPAs, such as those envisioned in the December 9th proposal,” said David Stevens, president and CEO of the MBA. “Clearly, the GSEs were undercapitalized relative to their pre-crisis credit exposures.
However, Stevens said, their guarantee businesses have not only been preserved and conserved through the conservatorship, but have increased in value as a result of the increase in cash flows. There is certainly no need to further increase pricing.
It should also be clear, he said in a letter to the GSEs, that any further increases in credit prices will not “crowd in” private capital.
“Price is not the only obstacle preventing the return of an active private-label securities market,” Stevens said. “Further increases in credit pricing would only act as a dead-weight loss to the market and consumers.”
MBA also believes the adverse market delivery fee should be eliminated. Housing market conditions have improved, eliminating the justification for the imposition of these temporary add-on fees.
“The GSEs should also reduce LLPAs in recognition of the reduced counterparty risk exposure faced by the GSEs. Although loans with higher loan-to-value ratios require loan-level mortgage insurance, current GSE pricing does not fully account for this credit enhancement,” Stevens said. “The result is that current credit pricing is higher than it needs to be and presents an unnecessary obstacle to home purchases.2 This is particularly problematic now that the GSEs are moving to implement strong eligibility criteria for private MI firms.”
The strengthening of MI capital requirements provides new impetus for moving forward on MBA’s proposed up-front risk sharing proposal. Utilizing deeper up-front MI coverage on higher LTV loans and providing coverage on loans below 80% LTV from well-capitalized MIs would increase private capital participation in the market and could potentially reduce costs for borrowers if recognized with lower g-fees or LLPAs from the GSEs. This approach would reduce the risk borne by the GSEs, and ultimately by the taxpayer, while bringing additional private capital into the market.
MBA believes credit pricing levels should be set in relation to the short-, medium-, and long-term goals of policymakers. In the short-term, as entities in conservatorship, the GSEs are effectively wards of the Federal Government, and as such are instruments of national housing policy.
“In light of the tepid purchase market recovery, the GSEs and FHFA should be mindful of the extent to which current credit pricing levels, particularly the LLPAs, have priced many first-time homebuyers and low-to moderate-income borrowers out of the conventional housing finance market,” Stevens said. “Over the longer term, the credit pricing charged by secondary market credit guarantors should aim for a market rate of return on required capital, while covering expected losses and operational expenses. This rate of return will be determined in a competitive market with multiple competitors and the credible threat of additional entrants, and
hence will not need to be determined through the regulatory process. In the medium term, we are challenged to balance credit pricing between these two objectives, given the ongoing conservatorships of the GSEs.”
Stevens said that the outcome of housing finance reform should determine the direction of credit pricing and required capital levels over the longer term. These reforms will likely have a transition period, whereby new market entrants are allowed to build capital over time to ensure a stable, liquid market. In the meantime, there is no need for the GSEs to price to a capital requirement that is not currently in effect, and which would not be expected to be reached for a decade or more.