DeMarco: Guarantee Fees will Continue Gradual Rise

by devteam September 12th, 2012 | Share

Guarantee fees (G-fees) are likely torncontinue the pattern of gradual increases initiated since Freddie Mac andrnFannie Mae were placed in conservatorship. rn Edward J. DeMarco, ActingrnDirector of the Federal Housing Finance Agency told an audience at the AmericanrnMortgage Conference in Raleigh, North Carolina yesterday that the steadyrnincreases, over time, should gradually reduce taxpayers’ risk from thernfinancial support they provide to the two government sponsored enterprisesrn(GSEs).</p

Risk, however, is only a part of thernmotivation for increasing the cost to lenders and borrowers for the loanrnguarantees.  DeMarco said that even withrnthe improvements in the GSEs’ pricing of credit risk, these fees remain less thanrnwhat one would likely observe in a purely private, competitive market.  </p

He reminded the audience of his remarksrnat the same conference one year ago in which he spoke of his preference for arnseries of periodic, gradual hikes in the G-fees rather than one or two largerrnadjustments.  Since then, he said, therernhave been two such increases; the first took place in April and was an acrossrnthe board 10 basis point increase.  Thernsecond, set to begin later this year, is designed to average 10 basis points acrossrnthe two companies’ books of business with actual increases varying by loanrnterms and other factors.  “Thesernincreases will move Enterprise pricing closer to what it would be were mortgagerncredit risk borne solely by private capital, and it could begin to incentivizernprivate firms to increase their participation in the mortgage market.  We intend to stay on this path with futurernincreases,” he said.</p

DeMarco also said that his agency willrnsoon release a paper for public comment outlining a pricing approach that wouldrnaddress deficiencies in the current system which, while providing uniformityrnnationwide, does not take into account the costs associated with varying staternand local policies.  The paper willrnsuggest imposing an upfront fee on newly acquired single-family mortgagesrnoriginated in states where the GSEs are likely to incur default-related costsrnthat are significantly higher than the national average.</p

Demarco also told the Conference thatrnFHFA was about to introduce a new set of guidelines for reps and warranties forrnall single-family loans acquired by the GSEs after January 1, 2013.  MND has covered this new policy, released byrnFHFA this morning, in detail here.</p

FHFA is continuing to reduce the GSEs’rnlong-term risk exposure through various methods of risk sharing, DeMarco said,rnand is considering several alternatives including the expanded use of mortgagerninsurance and securities structures.  Thernagency is also continuing to explore options for disposing of the GSEs’ ownedrnreal estate (REO) and, after reviewing thousands of responses to a Request forrnInformation, is testing a program to allow investors to purchase pools ofrnFannie Mae foreclosed properties in hardest hit areas with the requirement theyrnbe kept as rentals for a specified number of years.</p

Earlier this year FHFA issued arnStrategic Plan for the GSEs which identified three goals for the next phase ofrnthe conservatorships:   to build a new infrastructure for thernsecondary mortgage market; gradually contract the GSEs’ dominant presence inrnthe marketplace; and maintain foreclosure prevention activities and creditrnavailability for new and refinanced mortgages. rnDeMarco said that analysis is well underway for building a securitizationrninfrastructure that could “serve as a utility that would outlast Fannie andrnFreddie as we know them.”  FHFA anticipatesrnreleasing a white paper in October on the new infrastructure in order torninitiate public input.</p

“In our view,” DeMarco said, “whateverrnthe structure of the secondary mortgage market of the future, certain keyrnfunctions will need to be performed.  Andrnin many cases, like developing data reporting standards, the standardization ofrnsuch functions would provide benefits to the overall market.”  “While Fannie Mae and Freddie Mac continuerntheir respective corporate activities while in conservatorship, as Conservator,rnFHFA is thinking ahead to a secondary market with multiple firms competing tornbring the capacity of global capital markets to finance individual mortgagesrnaround the country.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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