The Federal Housing Finance Agency (FHFA) today announced the results of its comprehensive review of guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises). FHFA has determined that current fees, on average, are at an appropriate level and that some modest adjustments to upfront guarantee fees are also appropriate.
As a result of its review, FHFA is directing Fannie Mae and Freddie Mac 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. Overall, the set of modest changes to guarantee fees are roughly revenue neutral for the Enterprises and will result in either little or no change for most borrowers.
“This is the culmination of months of review and analysis and reflects input received from a wide range of stakeholders,” said FHFA Director Melvin L. Watt. “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.
FHFA will continue to monitor guarantee fees closely and make adjustments, as necessary, on an ongoing basis.
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In early December, the Federal Housing Finance Agency (FHFA) announced plans to increase the base guarantee fee (g-fee) for all mortgages by 10 basis points, update the up-front g-fee grid, and eliminate the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Fannie Mae and Freddie Mac since 2008 effective in March and April 2014. FHFA announced today that it has directed Fannie Mae and Freddie Mac to delay implementation of these changes.
FHFA Director Melvin L. Watt, who was sworn in as Director on January 6, said that he intends to conduct a thorough evaluation of the proposed changes and their likely impact as expeditiously as possible, and would give not less than 120 days’ notice after completing the evaluation before implementing any changes. “The implications for mortgage credit availability and how these changes might interact with the new qualified mortgage standards could be significant,” said Watt. “I want to fully understand these implications before deciding whether to move forward with any adjustments to g-fee pricing.”
The Federal Housing Finance Agency (FHFA) today took additional steps toward fulfilling the Strategic Plan for Enterprise Conservatorships that FHFA published in February 2012. That Plan established a conservator goal of gradually contracting Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their operations. The basic premise behind the “contract” goal is that with an uncertain future and a general desire for private capital to re-enter the market, the companies’ market presence should be reduced gradually over time.
When FHFA set forth the 2013 Conservatorship Scorecard in March, it also set an expectation that guarantee fees would continue to be gradually increased in 2013 in furtherance of the strategic plan. Today, FHFA directed Freddie Mac and Fannie Mae to raise guarantee fees in three components:
- The base g-fee (or ongoing g-fee) for all mortgages will increase by 10 basis points;
- The up-front g-fee grid will be updated to better align pricing with the credit risk characteristics of the borrower; and
- The up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Freddie Mac and Fannie Mae since 2008 is being eliminated except in the four states whose foreclosure carrying costs are more than two standard deviations greater than the national average.
FHFA expects these increases and decreases to produce an overall average g-fee increase of
approximately 11 basis points based on loan purchases of Fannie Mae and Freddie Mac in the
third quarter of 2013. This represents an average increase of 14 basis points on typical 30-year
mortgages and 4 basis points on 15-year mortgages. This increase follows FHFA-directed
increases of 10 basis points each announced in December 2011 and August 2012.
“Today’s price changes improve the relationship between g-fees and risk,” said FHFA Acting
Director Edward J. DeMarco. “The new pricing continues the gradual progression towards
more market-based prices, closer to the pricing one might expect to see if mortgage credit risk
was borne solely by private capital. The price changes provide better protection of and return
to taxpayers, who are providing the capital support that keeps these companies operating.
These changes should encourage further return of private capital to the mortgage market,”
DeMarco said. Today’s increases not only advance the previously stated conservatorship goals and
commitments, they also advance:
- the statutory directive in the Temporary Payroll Tax Cut Continuation Act of 2011 foradjusting g-fees based on risk levels;
- the 2013 Financial Stability Oversight Council recommendation that g-fee increases beused to attract private capital to the mortgage market; and
- the President’s August, 2013 request for FHFA to reduce taxpayers’ credit exposure by accelerating actions to draw private capital into the market to stand ahead of the Fannie Mae and Freddie Mac guarantee.
The g-fee changes being made today, including the improved risk sensitivity of the pricing
framework, are important steps to enabling Freddie Mac and Fannie Mae to deepen and
broaden the risk-sharing transactions with private investors they initiated this year. In the
coming years, FHFA expects risk-sharing transactions to cover a growing portion of the
companies’ new business and for the amount of risk transferred to private capital to continue to
Elimination of the across-the-board adverse market fee (except as noted) provides recognition that the nationwide stress in housing markets has eased. The experience with mortgage defaults the past several years, however, has amply demonstrated that mortgage investors and guarantors have significantly greater costs carrying out foreclosures in the few states that stand far apart from the rest of the country. As described in more detail in the paper entitled State-Level Guarantee Fee Analysis, maintaining the 25-basis-point adverse market fee in New York, Flordia, New Jersey, and Connecticut will provide taxpayers, as investors in Freddie Mac and Fannie Mae, an approximate compesnation for the difference in foreclosure costs in those states relative to the average costs across the country. FHFA anticipates that this adverse market fee will be re-evaluated and refined at least annually. While the broad adverse market fee is being eliminated, other changes to the up-front pricing grid offset this decrease for certain mortgages.
For loans exchanged for mortgage-backed securities, the price changes will be effective with
settlements starting April 1, 2014. For loans sold for cash, the price changes will be effective
with commitments starting March 1, 2014. Freddie Mac and Fannie Mae will work directly
with lenders to implement the changes.
Also today, FHFA released its fifth annual report on single-family guarantee fees, covering the
years 2011 and 2012. The g-fee changes being announced today respond in part to the findings
in this report regarding shortfalls in the risk-based pricing at the two companies.