As was expected, the Federal Housing Finance Agency (FHFA) is increasing the guarantee-fees (g-fees) that will be charged by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, starting next year.
Specifically, the base g-fee (or ongoing g-fee) for all mortgages will increase by 10 basis points; the upfront g-fee grid will be updated to better align pricing with the credit risk characteristics of the borrower; and the upfront 25-basis-point adverse market fee that has been assessed on all mortgages purchased by the GSEs since 2008 is being eliminated, except in the four states (Connecticut, Florida, New Jersey and New York) whose foreclosure carrying costs are more than two standard deviations greater than the national average. The g-fee increases will be spread throughout the year.
The adjustments are expected to produce an overall average g-fee increase of approximately 11 basis points, based on GSE loan purchases 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.
By increasing the g-fees, the FHFA aims to infuse the market with more private capital by opening up more credit risk sharing to investors, as well as to reduce the GSEs' dominance in the marketplace in preparation for their inevitable transition out of government conservatorship. Currently, there are several housing finance reform bills before Congress that call for the GSEs to be either returned to the private sector, partially dismantled and/or replaced with a government backstop, or completely dissolved.
‘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,’ says Edward DeMarco, acting director of the FHFA, in a statement. ‘The price changes provide better protection of and return to taxpayers, who are providing the capital support that keeps these companies operating.’
The FHFA has already more than doubled the g-fees Fannie and Freddie charge since they were placed into conservatorship in 2008.
‘A key reason to increase guarantee fees is to bring the pricing for credit risk closer to what would be required by private-sector providers,’ DeMarco explained during a speech at the recent Mortgage Bankers Associations 100th Annual Expo & Conference in Washington, D.C. ‘While that level is difficult to evaluate with precision, I believe we are getting closer to a level that would encourage more private sector participation, and we plan to continue pursuing gradual guarantee-fee increases in the near future.’
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