The Federal Housing Finance Agency is leaving g-fees largely alone but it is revising requirements for private mortgage insurance companies that insure mortgage loans either owned or guaranteed by Fannie Mae and Freddie Mac.
The revised eligibility requirements set financial and operational standards that private mortgage insurers must meet to receive approved insurer status with Fannie Mae or Freddie Mac and are designed to reduce risk to the GSEs. The new mortgage insurance requirements are effective December 31, 2015.
Fannie Mae and Freddie Mac are issuing these requirements after the GSEs and FHFA consulted with a range of stakeholders, including state insurance commissioners, private mortgage insurers, consumer advocates and seller/servicers.
FHFA said it finds no compelling economic reason to change the general level of fees. FHFA, however, is making certain minor and targeted fee adjustments. The effect will be to slightly lower fees for riskier borrowers, the FHFA said when pressed in a conference call, though they said it is revenue neutral and will therefore be “a wash.” The g-fee changes are effective September 1, 2015.
They want the GSEs to eliminate the adverse market charge put in place in March 2008 and to replace the revenue that resulted from the adverse market charge with targeted increases in guarantee fees to address various risk-based and access-to-credit considerations. In making adjustments to the guarantee fees for certain categories of loans, FHFA took into account its decision – also announced today – to strengthen financial and operational eligibility standards for mortgage insurance companies.
Those getting the biggest break from the adjustment to fees will benefit from a 5-basis point cut while those on the lowest end will see a 7-10 basis point increase. The bulk of loans, though, will see little if any change, FHFA said, based on their recent mix of loans.
Former acting director of the FHFA Ed DeMarco announced plans in 2013 to raise g-fees in an attempt to shrink the role of Fannie and Freddie in the mortgage finance market, but shortly after being appointed to become the first full director, Watt stopped the plans short.
Overall, the agency says, since all of the guarantee fee changes are small, the agency does not expect the adjustments to cause any material changes to the Enterprises’ loan volume in any of the loan categories and expects the small changes to be revenue neutral.
“This is the culmination of months of review and analysis and reflects input received from a wide range of stakeholders,” FHFA Director Melvin Watt said. “Our goal is to assure taxpayers, homeowners and industry that we are striving for an appropriate balance between safety and soundness and liquidity in the housing finance market,” Watt said.
Watt said that the current average level of guarantee fees appropriately reflects the current costs and risks associated with providing the Enterprises’ credit guarantee.
“The requirements announced today are prudent steps to align and strengthen Fannie Mae and Freddie Mac’s operational and financial requirements for private mortgage insurance companies, which will reduce the Enterprises’ overall risk and protect taxpayers,” Watt said. “Completion of this requirement fulfills a key Scorecard item for the Enterprises.”
Commenting on the changes to PMI standards, Dave Lowman, executive vice president of single family business at Freddie Mac, said that the revisions will strengthen insurers position.
“Freddie Mac continually explores ways to broaden access to mortgage credit while reducing risk to taxpayers and building towards a sound and stable housing finance system for future borrowers. Private mortgage insurance is an important component of the housing finance system, one that helps to make homeownership possible for those families for whom a higher downpayment may be an obstacle,” Lowman said. “The revised eligibility standards, which take effect on December 31, 2015, will promote counterparty strength for approved insurers and strengthen their role in the housing finance system. Today’s announcement underscores Freddie Mac’s commitment to working with FHFA, the housing industry and other stakeholders to improve America’s mortgage finance system.”
Fannie’s executive vice president of single-family business, Andrew Bon Salle, said this is a plus for private insurers.
“Mortgage insurance is a critical part of helping families have access to mortgages that they can afford for the long run,” Bon Salle said. “We are pleased to finalize these requirements, which will help ensure that our mortgage insurance partners are strong counterparties in the future. The publication of these requirements marks a significant milestone in restoring confidence in the private mortgage insurance industry, and will enhance their key role in providing private capital support for our business.”
G-fees cover three cost components that the GSEs expect to incur in providing their guarantee. They are: 1) the expected costs that result from the failure of some borrowers to make their payments; 2) the cost of holding the modeled capital amount necessary to protect against potentially much larger unexpected losses that result from the failure of some borrowers to make their payments in a severe stress environment; and 3) general and administrative expenses. Collectively, these costs comprise the estimated cost of providing the credit guarantee.
The guarantee fee adjustments directed by FHFA fall into two categories.
First, the foundational adjustment is removing the 25 basis point upfront adverse market charge. The GSEs established this fee in 2008 as an on-top pricing increase to reflect the unfavorable condition of the national housing market at that time. FHFA believes it is appropriate to remove this housing crisis-era fee in light of improvements in the housing markets. The agency is also setting aside its December 2013 decision to retain the adverse market charge in certain states with higher than average foreclosure related costs.
Second, the agency is applying targeted and small fee adjustments to a subset of GSE loans. This includes small fee increases for certain loans in the Enterprises’ upfront loan-to-value ratio/credit score pricing grid and for certain loans with risk-layering attributes (i.e., cash-out refinances, investment properties, loans with secondary financing, and jumbo conforming loans). The decision to eliminate the adverse market charge yet maintain the overall average level of guarantee fees required a plan to recover this revenue. The set of targeted adjustments to guarantee fees described below only apply to the Enterprises’ upfront fees and do not affect base, ongoing guarantee fees. The fee changes will become effective for loans delivered to the Enterprises beginning on September 1, 2015. The agency does not expect a material change in the Enterprises’ loan volume as a result of these changes.
In the Enterprises’ LTV/credit score grids, which apply to loans with terms exceeding 15 years, FHFA is directing the Enterprises to increase the upfront fees by 25 basis points for loans that have both an LTV ratio of 80% or less and credit-score of 700 or more.
For loans that have an LTV ratio above 80% or a credit score below 700, FHFA is generally leaving the upfront fees the same. As a result, these loans will receive the full benefit of the 25 basis point adverse market charge elimination. Contributing to the determination to leave the upfront fees the same for this LTV/credit score group is FHFA’s separate action to finalize new standards for mortgage insurers – Private Mortgage Insurer Eligibility Requirements. Loans with less than a 20% down payment are required to have credit enhancement, which lenders typically satisfy with private mortgage insurance. FHFA anticipates that the finalized PMIERs will provide a modest cost savings to the Enterprises from reduced mortgage insurer counterparty exposure.
FHFA is also directing the Enterprises to increase guarantee fees on certain higher-risk loan types to improve risk-based pricing. Specifically, the agency is increasing fees by 37.5 basis points on cash-out refinances, investment properties, and loans with simultaneous secondary financing. Consistent with the practice today, when a loan falls into more than one category (e.g., both a cash-out refinance and investment property), the add-on fees are cumulative, which results in the net increase in those cases being higher than 37.5 basis points.
Jumbo Conforming Loans FHFA is directing the Enterprises to increase the fee on jumbo conforming loans (over $417,000) by 25 basis points. Congress allowed the Enterprises to acquire these higher balance loans in certain high cost areas of the country in response to the housing crisis.