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The chairman of the House Financial Services Committee recommends a hike in the guarantee fees charged by Fannie and Freddie that would raise more money than what the administration has proposed.
October 14 -
Fannie Mae and Freddie Mac are gradually increasing the guarantee fees they collect from lenders, and may discontinue the volume discounts they give large banks, acting director of the Federal Housing Finance Agency Ed DeMarco said on Monday.
September 19
Some mortgage industry members are applauding Congressional efforts to raise the guarantee fees that Fannie Mae and Freddie Mac charge lenders, saying the fee increases could help bring private investors back into the mortgage market.
House Republicans and Senate Democrats have
The proposals come as Fannie and Freddie
Private investors have withdrawn from the market, in part, because they cannot compete with the government's rock-bottom prices for mortgage-default guarantees. But if the government raises guarantee fees by a high enough amount, the increases would make the market rates more attractive and entice private investors to buy loans from lenders themselves.
That would reignite the market for private securitizations, helping to wean the mortgage-bond market off of government support and diminishing the roles of government wards Fannie and Freddie.
"Private secondary market investors are starving for yield, and raising the g-fees to a level where they can compete would allow private capital to come back into the market," says Terry Wakefield, the chief executive of Wakefield Co., a Mequon, Wis., mortgage consulting firm.
The volume discounts Fannie and Freddie gave to large banks have long been a point of contention in the mortgage industry, particularly for community banks and smaller lenders that pay higher fees to cover the risk.
During the housing boom before the financial crisis, the GSEs competed against each other for business and used volume discounts as incentives for the largest lenders to sell them mortgages.
Community bankers have long protested that arrangement. Fannie and Freddie should have been charging lenders like Countrywide Financial Corp. a premium to cover the higher risk of those mortgages, says Ron Haynie, president and chief executive of ICBA Mortgage, a subsidiary of the Independent Community Bankers of America.
He adds that community banks, which originated fewer but better-quality loans, ended up paying higher guarantee fees — requiring them to charge borrowers more and making it tougher for them to compete for business.
"Negotiating fees based on volume is absolutely ridiculous," says Haynie. "The discounts helped drive consolidation to the larger banks."
Ed DeMarco, acting head of the GSEs' primary regulator, has signaled for months that the volume discounts that Fannie and Freddie gave Bank of America Corp., Wells Fargo & Co. and other large lenders would be eliminated. DeMarco has argued that the federal subsidy to large banks is unnecessary and could potentially save taxpayers money, since the GSEs are operating under conservatorship and no longer compete against each other.
Haynie, whose organization represents smaller banks, says that ending the discounts to the big banks will "better reflect risk" and allow community banks to remain competitive.
Mortgage consultant Wakefield agrees, arguing that the GSEs' old business model helped distort the market, by giving large banks a pricing advantage without taking into account the delinquency rates and default records at those lenders.
"G-fees should be based on loss experience, not volume," he says.
(To be sure, as housing prices surged before the financial crisis, most lenders' losses were artificially low and statistical models predicted a 3% average increase per year in home prices. The government-sponsored enterprises' models did not take into account the possibility that home prices could decline nationally.)
Some experts warn that raising guarantee fees could have negative ramifications for the industry's recovery. Lenders tend to pass on higher costs to borrowers in the form of higher interest rates, so an increase in guarantee fees could dampen the already-lackluster housing market.
"Why would you throw a tax on top of the housing market when it's already hard for lenders to make more loans?" says Clifford Rossi, a finance professor at the University of Maryland, who set g-fees when he was an executive at Freddie Mac. "The housing market doesn't need more pain."
The Congressional proposals for higher fees also come at a time when some smaller lenders are finally seeing a bit of relief.
"The GSEs have been helping in lowering our [guarantee fees] because they were lousy before," says Glenn Stearns, the founder and CEO of Stearns Lending Corp. The Santa Ana, Calif., company is the 22nd-largest mortgage lender in the United States.
The large banks "still have a much better g-fee than we do and that's factored into our pricing," he adds.
The GSEs' methods for setting guarantee fees have long lacked transparency. When g-fees originally were originated in the early 1980s, they averaged 25 basis points for a prime loan with plain-vanilla characteristics. That fee would include a profit to the GSEs and the cost of covering defaults.
Fannie and Freddie began negotiating lower g-fees for large banks when the housing market heated up and they were losing business to private mortgage investors. In order to gain volume from large banks, now-former Fannie and Freddie executives lowered the fees in the form of so-called "volume discounts," because their bonuses were tied to affordable housing goals set by Congress. In order to meet those affordable housing goals, the GSEs needed to buy a huge number of loans — or the executives would not get their bonuses.
Over the years g-fees fell to as low as 11 basis points of the loan balance for some large banks. Small lenders paid fees that were up to 8 basis points higher for loans of similar credit quality, according to a recent report by the Federal Housing Finance Agency, the GSEs' primary regulator.
The House bill (H.R. 3630) calls for a 10 basis-point increase in guarantee fees over two years, which would raise $35.7 billion in revenue in the next decade. The Senate bill calls for a 12.5 basis-point hike, which would raise $38 billion in the same period.
But Rossi raises concerns that these proposals may not go far enough to help wean the mortgage-bond market off of its government backstop. Guarantee fees would have to rise to at least 30 basis points or more to catch the attention of private investors.
"You might start to see some movement back into the market," he said. 'The only good thing I see out of this is the possibility that it could be stimulative to private capital."
