Fannie Mae, Freddie Mac Guarantee Fees Boosted by Regulator

Fannie Mae, Freddie Mac Guarantee Fees Increased by Regulator
A residential home loan application is arranged for a photograph in San Francisco. Lenders typically pass the fees along to borrowers in the form of higher interest rates. Photographer: David Paul Morris/Bloomberg

Fannie Mae and Freddie Mac, the U.S.-owned mortgage-finance companies, will raise by an average of 10 basis points the fees they charge lenders to guarantee loans, the Federal Housing Finance Agency said in a statement.

FHFA Acting Director Edward J. DeMarco sought the fee increase to boost fiscal stability at the government-sponsored enterprises and shrink their footprint in the mortgage market, where they own or guarantee about 60 percent of U.S. home loans.

“These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital,” DeMarco said in the statement released yesterday.

The guarantee-fee increases, which begin taking effect in November, probably will be passed on to borrowers in the form of higher interest rates and are small enough that they won’t stall mortgage lending, banking-industry trade groups said.

“It’s obviously going to have a small impact on pricing, but given that mortgage rates are the lowest they’ve ever been, we think it’s probably the right time to do it,” Joseph Pigg, vice president at the American Bankers Association, said in a telephone interview yesterday.

An increase of 10 basis points would cost a borrower with a $200,000 mortgage about $4,000 over a 30-year loan term.

FHFA, which has overseen Fannie Mae and Freddie Mac since they were seized by regulators in 2008, has been planning since last year to raise fees charged for guaranteeing principal and interest, a system designed to boost lending and homeownership.

Local Cost

The agency said it also will seek public input on a plan to charge different guarantee fees in each state based on the local cost to the GSEs of carrying foreclosures. Calibrations of pricing based on risk are part of FHFA’s plan to encourage a revival of private industry’s role in housing finance.

“The 10-basis point increase is an incremental step toward implementing risk-based pricing,” Isaac Boltansky, a Washington-based policy analyst at Compass Point Research & Trading LLC, said in a phone interview. “The real issue that observers have to keep in mind is that there’ll be a whole new approach going out from FHFA based on state-level information.”

The lack of private capital in the housing market isn’t driven only by competition from Fannie Mae and Freddie Mac but also by uncertainty about prices and other concerns, David Stevens, president of the Mortgage Bankers Association, said in a telephone interview. Therefore, he said, regulators should ensure they don’t raise the fees too high.

‘Excessive Increases’

“Excessive increases may disproportionately affect the housing recovery without creating any new entree of private capital,” Stevens said.

The fee increase will begin Nov. 1 for loans sold for cash and Dec. 1 for loans exchanged for mortgage-backed securities, FHFA said.

Fannie Mae and Freddie Mac have taken almost $190 billion in U.S. aid since they were placed under conservatorship in September 2008 after losses on investments in risky loans pushed them to the brink of insolvency. The companies have paid about $46 billion in the form of dividends on the government’s nearly 80 percent stakes in each of them. In future quarters, the companies will turn over all profits to the Treasury instead of paying dividends, FHFA said this month.

The last guarantee-fee increase took effect in April after Congress boosted them by 10 basis points to fund a payroll tax cut. It was the first time fee proceeds had been diverted into the U.S. Treasury instead of helping offset the risk borne by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia.

The average guarantee fee charged by the two companies rose to 28 basis points in 2011 from 26 basis points in 2010, according to a report FHFA also released yesterday. By the end of the year, after both increases are in effect, fees could average about 48 basis points.

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