The U.S. regulator for Fannie Mae and Freddie Mac has released adjustments for fees the companies charge to guarantee mortgages that will keep costs largely the same for most borrowers.
Borrowers with weaker credit will pay slightly lower fees, while most others will see prices remain the same, the Federal Housing Finance Agency said Friday. Certain riskier loans, such as those on investment properties, those over $417,000 and cash-out refinances will become incrementally more expensive.
The moves were announced by the FHFA in tandem with new capital standards for mortgage insurers. Insurers have said those rules could lead to higher premiums for weaker borrowers, potentially offsetting savings from the lower fees.
“The FHFA has determined that current fees, on average, are at an appropriate level,” the agency said in a statement.
The modest tweaks mean that for now, Fannie Mae and Freddie Mac aren’t likely to expand lending to borrowers at the lower end of the market who are finding it hard to obtain mortgages. FHFA Director Melvin L. Watt, a former Democratic congressman who took over at the agency last year, has been walking a fine line between easing tight credit and ensuring that the U.S.- owned companies remain financially sound.
Watt halted a succession of fee increases implemented by his predecessor to shrink the government-sponsored enterprises’ footprint in the mortgage market. Even with the changes, fees on average remain about twice 2009 levels.
Fannie Mae and Freddie Mac buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest. The guarantee fees typically are passed along to borrowers in the form of higher interest rates.
The companies will eliminate an “adverse market” fee of 25 basis points that they began charging all borrowers after the financial crisis. They’ll raise fees by the same amount for borrowers with credit scores above 700 and at least 20 percent equity in their homes, meaning the changes will be a wash. Borrowers with weaker credit or less equity won’t see an increase, so their payments will fall by 25 basis points. Mortgages over $417,000 will go up 25 basis points, and some higher-risk loans will rise 37.5 basis points.
Each change of 10 basis points amounts to a difference of about $3,000 over 30 years for a borrower with a $200,000 loan.
The FHFA scrapped a plan to charge more for borrowers in states such as New York and New Jersey where long foreclosure timelines have increased costs for Fannie Mae and Freddie Mac.
Julia Gordon, director of housing finance and policy at the Center for American Progress, a group affiliated with Democrats, said she was pleased that proposal was eliminated. Still, she said, the FHFA could have done more to help homebuyers by getting rid of fees charged to weaker borrowers that were instituted after the housing meltdown.
“By failing to eliminate the steep, risk-based pricing, they really missed an opportunity to expand access to credit and reach the communities that have been locked out of the conventional market,” Gordon said.
At the same time, the companies will begin requiring that mortgage guarantors hold more capital against riskier loans, complying with rules known as Private Mortgage Insurer Eligibility Requirements.
The FHFA said Friday that in order to back loans packaged into securities by Fannie Mae and Freddie Mac, insurers would have to hold liquid assets worth at least 5.6 percent of their risk exposure. That compares with about 4 percent under existing state-based rules that use a broader definition of capital.
Mortgage insurers cover losses when homeowners default. Fannie Mae and Freddie Mac require insurance when homeowners make down-payments below 20 percent. The new standards are designed to ensure there’s no repeat of what happened after the financial crisis, when a plunge in home prices pushed about half the industry out of the business. Fannie Mae and Freddie Mac were saddled with losses when insurers were unable to meet their obligations.
Survivors led by MGIC Investment Corp. and Radian Group Inc. have raised fresh funds so they can sell more coverage as home sales recover.
Mortgage insurers said they were ready for the restrictions. Radian, which sold a unit this month for about $800 million, could comply with the rules immediately by using about $330 million in liquid assets, the insurer said. The Philadelphia-based company would need less money as capital by the Dec. 31 deadline, it said.
Mortgage insurers said they were ready for the restrictions. Radian could comply with the rules immediately by using about $330 million in assets it currently holds, the insurer said. The Philadelphia-based company would need less money as capital by the Dec. 31 deadline, it said.
Essent Group Ltd. said in a statement that it had enough assets to meet its requirements and was “well-positioned” to adapt. MGIC will likely be in compliance by the time the rules go into effect, the company said in a separate statement. Still, there was a shortfall of about $230 million as of March 31, according to the company.
In comments submitted to the FHFA last year, mortgage insurers warned that requiring them to hold more capital against riskier loans would lead them to increase premiums for weaker borrowers. Higher costs for loans backed by Fannie Mae and Freddie Mac could push borrowers toward the government mortgage insurance program at the Federal Housing Administration, which cut its premiums earlier this year.
The final version of the insurer rules will become effective on Dec. 31. The fee changes will go into effect for loans purchased by Fannie Mae and Freddie Mac after Sept. 1.
FHFA officials said they would continue to monitor housing-market conditions to determine whether additional fee changes are necessary.