The fees that Fannie Mae and Freddie Mac charge lenders to guarantee mortgage loans actually serve as a tax on consumers and prevent more potential borrowers from becoming actual borrowers, a coalition of the nation’s largest housing groups said Wednesday.
The coalition, which includes 26 housing and community groups, sent a letter Wednesday to the Federal Housing Finance Agency, stating that the current level of Fannie and Freddie’s fees unfairly impact borrowers, especially low- and moderate-income and first-time homebuyers.
In the letter, the groups request that the FHFA either reduce or completely eliminate the loan-level price adjustments currently in place for government-sponsored enterprise loans.
According to the groups’ letter, the GSEs credit pricing currently includes LLPAs and ongoing guarantee fees, both of which are “ultimately borne” by borrowers as part of their up-front closing costs and/or as part of their ongoing monthly payments.
The groups state that the LLPAs were introduced in 2008 and can vary greatly based on loan terms including borrowers’ credit scores, loan-to-value ratios and other risk factors.
According to the groups, the LLPAs can rise as high as 4% of the loan value for some borrowers.
In addition, the groups state that g-fees have “increased sharply” since 2009 and, when combined with LLPAs, have resulted in “substantial gains” in the GSEs’ income, adding that those increases have not helped achieve “broad access to credit” in spite of the “unprecedented liquidity” provided to Fannie and Freddie by the federal government.
“No borrower should face arbitrarily high prices for mortgage credit, especially when the burden is felt particularly hard by low- and moderate-income and first-time homebuyers,” the groups write. “We therefore request that FHFA direct the GSEs to reduce or eliminate LLPAs going forward.”
The groups’ letter, which is signed by the America’s Homeowner Alliance, the American Bankers Association, the American Escrow Association, the American Land Title Association, the Asian Real Estate Association of America, the Center for Responsible Lending, the Community Association Institute, the Consumer Federation of America, the Consumer Mortgage Coalition, the Credit Union National Association, Enterprise Community Partners, Habitat for Humanity International, the Mortgage Bankers Association, NAACP, the National Association of Federal Credit Unions, the National Association of Hispanic Real Estate Professionals, the National Association of Home Builders, the National Association of Real Estate Brokers, the National Association of Realtors, the National Council of La Raza, the National Fair Housing Alliance, the National Housing Conference, the Real Estate Settlement Procedures Council, The Realty Alliance, and U.S. Mortgage Insurers, argues that there have been a “number of developments” since 2008 that have both increased mortgage credit quality and reduced GSE risk exposure, making the current level of GSE loan fees unnecessary.
Among those developments are “rigorous mortgage underwriting and fully documented mortgage files,” which ensures that the mortgages sold to the GSEs are “high quality” and low risk.
The groups also states that “enhanced mortgage insurer reliability,” via the capital requirements placed on private mortgage insurers “strengthen the MIs’ ability to pay claims in all economic cycles.”
Additionally, the groups stated that “improved industry standards and regulation,” including the recently finalized representation and warranty polices announced by the FHFA in February, as well as repurchase enforcement reforms, loan data transparency and accuracy, and underwriting rules that have improved since the housing crisis “should restore investor confidence and reduce GSE/taxpayer risk exposure.”
For all those reasons and more, the groups say the FHFA should reduce or eliminate the LLPAs.
The groups also note that the average g-fee increased approximately 164% from 22 basis points to 58 basis points between 2009 and 2014, while credit quality increased and regulations took effect that limits the risk to the GSEs.
But despite these changes, the framework for calculating g-fees and LLPAs has largely remained the same, the groups state.
“Our organizations believe that the framework used to set g-fees and LLPAs should be transparent,” the groups write. “In light of the strong capital requirements established by PMIERs, the credit pricing framework should also fully account for the risk-reducing benefits of MI in the first-loss position, as well as significant improvements in underwriting requirements as a result of the Dodd-Frank Act.”
The groups state that the combination of the increased g-fees and the “market impact” of the LLPAs have “effectively resulted in many qualified borrowers being priced away from the conforming loan market.”
The groups stated that the GSEs credit pricing “should not be based on maximizing income to the GSEs, or funding non-housing related government expenditures.”
Instead, the groups state that GSE credit pricing “should provide access to credit for a broad range of borrowers, and promote a ‘liquid and efficient national housing market,’ all while maintaining the safety and solvency of the GSEs.
“Eight years after the financial crisis, mortgage credit quality has improved dramatically and regulations have improved the industries risk management practices,” the groups conclude. “We believe these changes justify eliminating LLPAs. Our organizations and members appreciate the opportunity to raise this important issue so closely tied to expanding homeownership for millions of Americans.”