Fannie, Freddie Raise Fees, May Kill Volume Discounts

RALEIGH, N.C. — Fannie Mae and Freddie Mac are gradually increasing the guarantee fees they charge mortgage lenders and may discontinue the volume discounts they give large banks, a top regulatory official said on Monday.

Ed DeMarco, acting director of the Federal Housing Finance Agency, said the volume discounts given to large banks like Bank of America Corp. and Wells Fargo & Co. may be phased out because they were "based on competition between the enterprises to gain market share."

Those discounts have long been a point of contention in the mortgage industry, especially from smaller lenders that are not eligible. But now that the government-sponsored enterprises are operating under conservatorship, they no longer compete with each other for the largest banks' business, DeMarco said.

"That kind of competition does not fit well with the enterprises operating in conservatorship," DeMarco said at a conference in Raleigh, N.C. on Monday. "It raises questions about the appropriateness of that as a driver of pricing."

Both Fannie and Freddie began raising guarantee fees earlier this year and will continue doing so through 2012, DeMarco said.

The White House separately on Monday proposed "modestly" raising the fees that Fannie Mae and Freddie Mac charge mortgage lenders to guarantee repayment of new mortgage loans. President Barack Obama's administration made the suggestion as part of its plan to reduce the federal deficit.

Guarantee fee increases would "protect taxpayers and help rebuild the robust private mortgage market necessary to our nation's longterm economic well-being," according to the administration's 80-page report.

DeMarco said at the conference that the FHFA also plans to take into account "different levels of risk across the country" and may raise the fees they can charge lenders in judicial states where the foreclosure process can drag on for as long as three years.

The loss on a defaulted mortgage "is determined by where that mortgage is in the country," DeMarco said. "Various state and local laws can greatly impact the enterprises' costs since foreclosure timelines vary considerably."

The FHFA also is considering more risk-sharing alternatives, including a greater use of mortgage insurance, according to DeMarco. The agency could also off-load current risk by creating new securities structures with different classes that would be guaranteed — or not — to allow the government to move risk to the private sector.

"Over time there needs to be continued movement along the path of guarantee-fee pricing adjustments and risk-sharing to move some of the credit risk off the books of Fannie and Freddie and into the private market," he said. "Fully private firms operating with their own capital at risk would be more likely to give greater weight to more negative scenarios … than the enterprises do operating under the umbrella of conservatorship and government capital."

In the short term, Fannie and Freddie are making changes that would allow underwater borrowers to refinance their loans at low rates. Lenders have been reluctant to allow refinancing for borrowers with loan-to-value ratios above 125%, because they fear that such refinancing could increase their risk of being forced to repurchase the securities they sold from these mortgages.

DeMarco said the FHFA is examining whether "repurchase risk is an impediment to refinancing."

Matthew Jozoff, managing director and head of mortgage strategy of J.P. Morgan Chase & Co., wrote in a research note Monday that he expects FHFA to raise the 125% loan-to-value limit to allow more underwater borrowers to refinance. But he cautioned that mass refinancings "may be contrary to FHFA's mandate."

The FHFA is also reviewing more than 4,000 submissions on how to dispose of real estate-owned properties. The agency requested suggestions in August, and DeMarco said it will "take a little time to review so many responses but we are already hard at work doing so."

Earlier Monday at the American Mortgage Conference, the chief executive of Fannie Mae was asked whether the steady stream of repurchase demands to banks would continue.

"The trend is still going and quite frankly there's still a lot to work through," Fannie CEO Michael Williams told a crowd of roughly 250 bankers. "Quite frankly, I think we're in the middle of the game."