With the recovery of the housing market still a long ways away, the current debate over GSE guarantee fees is critical to the sector’s prospects, and while many argue that higher g-fees are necessary to entice more private capital into the mortgage market, Mark Zandi, Chief Economist at Moody’s Analytics, believes this is a stretch.

Zandi's bottom line?

Don't mess with the Jesus g-fees.

And well, you know, that's not just like, his opinion, man. 

In a recent report, he notes that Fannie Mae and Freddie Mac’s existing g-fees are consistent with the current health of the housing and mortgage markets and should not be changed at this time – a lot more must happen before the nation’s housing and mortgage markets function well, but a change in Fannie and Freddie’s g-fees is not one of them.

Zandi argues that:

  • The fees are high enough to appropriately protect taxpayers against losses the GSEs would face in another Great Recession. Any increase in fees on more creditworthy borrowers would likely lead to the best borrowers leaving the GSEs and going to bank lenders.
  • The revival of the private market depends on resolving regulatory and legal issues that will not occur any more quickly with a reasonable increase in gfees.  And higher fees and mortgage rates run the risk of short-circuiting the already-fragile housing recovery.
  • GSE g-fees may eventually need to change if Fannie and Freddie are ever privatized. Next-gen G-fees that fluctuate in opposition to the growth of house prices would provide a powerful countercyclical tool for preventing future housing bubbles from forming.

Nearly a decade after the housing bubble burst, the nation’s housing and mortgage markets are still far from normal. Lower- and middle-income households still have difficulty obtaining mortgage loans, crimping housing demand and homebuilding.

House prices, which rebounded strongly after hitting bottom in the wake of the crash, have also slowed.

“The FHFA is now considering whether the GSEs’ g-fees should change again. Some argue they should be increased further, believing this will attract more private capital into the housing finance system. Others argue they should be lowered, particularly for less creditworthy borrowers, believing this will responsibly help harder-pressed house- holds become homeowners and support the housing recovery,” Zandi says.

“The FHFA should not appreciably change the GSEs’ current g-fees. The fees are high enough to appropriately protect taxpayers against losses the GSEs would face in another Great Recession,” he says.

In his note, Zandi argues that the fees vary considerably across the credit distribution, and while there could be some reduction in fees for borrowers with lower scores and higher LTVs, particularly as the private MIs incorporate the new Private Mortgage Insurance Eligibility Requirements, any reductions should be modest.

“The GSEs should not make loans at a loss, and since overall g-fees are currently appropriate to protect taxpayers, any reduction in fees for less creditworthy borrowers must be made up for by higher fees on more creditworthy borrowers,” Zandi says. “But any increase in fees on more creditworthy borrowers would likely lead to adverse selection, with the best borrowers leaving the GSEs and going to bank lenders.

“The argument that higher GSE g-fees are necessary to entice more private capital into the mortgage market is a stretch. The revival of the PLS market depends on resolving regulatory and legal issues that will not occur any more quickly with a reasonable increase in g-fees,” he says. “And higher fees and mortgage rates run the risk of short-circuiting the already-fragile housing recovery.”

Zandi concedes that GSE g-fees may eventually need to increase if Fannie and Freddie are ever privatized. They would likely be considered "systemically important financial institutions" and reasonably required to hold more capital.

“Like the private MIs, the GSEs should be allowed to use future g-fee premiums to- ward these higher capital requirements, but they may not be enough. In addition, g-fees that fluctuate in opposition to the growth of house prices would provide a powerful countercyclical tool for preventing future housing bubbles from forming,” Zandi says.

However, these are discussions for another day, as bringing the GSEs out of conservatorship appears to be a long way off.

“A lot more must happen before the nation’s housing and mortgage markets are functioning well, but another change in Fannie and Freddie’s g-fees is not one of them,” he concludes.

So... mark it zero?