It will take a lot more than higher g-fees to bring private capital and the securitization of mortgages back to the industry, analysts at FBR Capital Markets contend.
The firm’s stance is aligned with Wells Fargo (WFC), but conflicts with JPMorgan Chase (JPM), which says increasing the g-fee to 50 basis points would cause private securitization of mortgage to flourish. FBR analyst recently met with senior management at both banking giants regarding the issue.
Fannie Mae and Freddie Mac are raising their guarantee fees charged to lenders by an average 10 basis points on Nov. 1 in order to encourage more private capital to fund the market, according to the Federal Housing Finance Agency. Congress will also consider raising the guarantee fees even more in order to pay for tax cuts and avoid the coming fiscal cliff.
Lenders paid an average 28 basis points in 2011 for Fannie or Freddie to guarantee their loans in the bonds issued to investors, up from 26 bps the year before, according to a report released by the FHFA Friday.
Wells Fargo’s management, FBR said, argues it will take a lot more than a g-fee of even 50 bps to bring the private-label market back to life. Qualified mortgage standards, proposed capital regulations, and a fundamental distrust of the ratings agencies could keep private capital out of the mortgage market.
“That said, Wells is more likely to add these loans to its portfolio as the economics improve,” FBR said.
However, if the government-sponsored enterprises raise the g-fee to 50 basis points, JPMorgan says, the economics of holding loans on the balance sheet and securitizing loans will become more attractive. At 50 bps, the GSEs would be pricing risk at four to five times greater than expected losses.
“Should this occur, JPM stated that it would like to reenter the market in a meaningful way, taking market share away from the GSEs,” FBR said. “We note that before any of this could take place, we would need the final rules on QM, QRM, and capital standards.”
But FBR agrees with Wells Fargo’s position, saying that QM, QRM, and capital standard final rules are needed before the impact of higher g-fees on the growth of private-label securitization market is even examined.
That said, “ultimately, significantly higher g-fees should benefit banks’ desire to both add loans to the balance sheet and improve their ability to securitize mortgage originations,” FBR concluded.