Guarantee fees (G-fees) are likely to continue the pattern of gradual increases initiated since Freddie Mac and Fannie Mae were placed in conservatorship. Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency told an audience at the American Mortgage Conference in Raleigh, North Carolina yesterday that the steady increases, over time, should gradually reduce taxpayers' risk from the financial support they provide to the two government sponsored enterprises (GSEs).
Risk, however, is only a part of the motivation for increasing the cost to lenders and borrowers for the loan guarantees. DeMarco said that even with the improvements in the GSEs' pricing of credit risk, these fees remain less than what one would likely observe in a purely private, competitive market.
He reminded the audience of his remarks at the same conference one year ago in which he spoke of his preference for a series of periodic, gradual hikes in the G-fees rather than one or two larger adjustments. Since then, he said, there have been two such increases; the first took place in April and was an across the board 10 basis point increase. The second, set to begin later this year, is designed to average 10 basis points across the two companies' books of business with actual increases varying by loan terms and other factors. "These increases will move Enterprise pricing closer to what it would be were mortgage credit risk borne solely by private capital, and it could begin to incentivize private firms to increase their participation in the mortgage market. We intend to stay on this path with future increases," he said.
DeMarco also said that his agency will soon release a paper for public comment outlining a pricing approach that would address deficiencies in the current system which, while providing uniformity nationwide, does not take into account the costs associated with varying state and local policies. The paper will suggest imposing an upfront fee on newly acquired single-family mortgages originated in states where the GSEs are likely to incur default-related costs that are significantly higher than the national average.
Demarco also told the Conference that FHFA was about to introduce a new set of guidelines for reps and warranties for all single-family loans acquired by the GSEs after January 1, 2013. MND has covered this new policy, released by FHFA this morning, in detail here.
FHFA is continuing to reduce the GSEs' long-term risk exposure through various methods of risk sharing, DeMarco said, and is considering several alternatives including the expanded use of mortgage insurance and securities structures. The agency is also continuing to explore options for disposing of the GSEs' owned real estate (REO) and, after reviewing thousands of responses to a Request for Information, is testing a program to allow investors to purchase pools of Fannie Mae foreclosed properties in hardest hit areas with the requirement they be kept as rentals for a specified number of years.
Earlier this year FHFA issued a Strategic Plan for the GSEs which identified three goals for the next phase of the conservatorships: to build a new infrastructure for the secondary mortgage market; gradually contract the GSEs' dominant presence in the marketplace; and maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. DeMarco said that analysis is well underway for building a securitization infrastructure that could "serve as a utility that would outlast Fannie and Freddie as we know them." FHFA anticipates releasing a white paper in October on the new infrastructure in order to initiate public input.
"In our view," DeMarco said, "whatever the structure of the secondary mortgage market of the future, certain key functions will need to be performed. And in many cases, like developing data reporting standards, the standardization of such functions would provide benefits to the overall market." "While Fannie Mae and Freddie Mac continue their respective corporate activities while in conservatorship, as Conservator, FHFA is thinking ahead to a secondary market with multiple firms competing to bring the capacity of global capital markets to finance individual mortgages around the country."