The GSEs should bernrequired to accept loans with deeper levels of credit enhancement in return forrnbona fide reductions in guarantee fees and other loan level charges.  MBA says that GSE (g-fees) fees have morernthan doubled over the last few years even as their acquisition profile showsrnthey are taking on very little credit risk,   For example, average credit scores forrnmortgage purchases prior to the crisis were about 720, today they are 760 andrnweighted LTV scores outside of HARP originations are several percentage pointsrnlower than they were pre-crisis. </p

With this combinationrnof high fees and ultra conservative underwriting it is not surprising that thernGSEs are seeing record profits.  “Theirrnrevenues are up and their costs are down, not through their execution, butrnthrough government fiat and a privileged market position,” the paper says.</p

Providing an optionrnfor lenders to secure loan-level private credit enhancement could createrneffective competition with guarantee fees now averaging 50 basis points.  Indications are that FHFA is likely torncontinue to raise these fees, perhaps to 70 basis points or higher.  With an alternative private creditrnenhancement channel at those higher rates consumers could be saving at least 20rnbasis points or $400 per year on a $200,000 loan. </p

Unlike what is envisionedrnby the current FHFA strategic plan, this risk sharing should occur at the frontrnend of the transaction.  FHFA isrncurrently calling for $30 billion in risk sharing by welcoming private capitalrnthrough additional mortgage insurance after the loans are in their hands.  This benefits the GSEs, the taxpayer, and thernprivate insurer but not the borrower. rnMoreover the GSEs maintain complete control over the transaction.  </p

By moving therninsurance transaction to precede the sales lenders would effectively “de-risk”rnthe loans before selling them and the mortgage insurers would be competing forrnbusiness in the open market across hundreds of lenders rather than through negotiatedrntransactions with the two GSEs.  </p

Wherernlenders today are responsible for securing credit enhancements – i.e. mortgagerninsurance or lender recourse – for loans with LTV’s above 80 percent, under arnfront-end risk sharing arrangements the GSEs would provide a reduction inrng-fees and LLPA if lenders secured credit enhancement on lower LTV loans orrndeeper enhancements on higher LTV loans that might lower them effectively to 50rnor 60 percent. The result would be a much lower g-fee</bdesigned to cover only severe or catastrophic risk. </p

MBA acknowledges<bpotential concerns about their proposals. rnFirst, does it over-rely on private mortgage insurers that are in somerncases still recovering from the downturn? rnMBA says there are risks in any system that relies on privaterncapital.  Private mortgage insurers havernregulated contingency reserves that largely survived the downturn and in thernevent of another severe event any form of private capital enhancement thatrnfailed would not be bailed out by taxpayers</p

Importantly, the existing companies have recently been able to raise significant additional equity, and there are new entrants in the market.  If this proposal moves forward, many investors, not just traditional mortgage insurers, will likely see opportunity and will bring additional capital into the credit enhancement space where they need to be held to rigorousrnfinancial strength standards.</p

There is also thernquestion of whether the GSEs would be willing participants in this up-frontrnrisk sharing.  Both are making recordrnprofits from guarantee fees and may not be willing to give up the benefits ofrnwhat MBA calls “crowding out private credit enhancement.”  MBA says FHFA should require the GSEs tornoffer a front-end risk sharing program as part of its stated goal ofrncontracting the current footprint of the GSEs in the market while maintainingrnmarket liquidity.</p

MBA’s concept paper concludes by sayingrnthat the 60 percent of new mortgage originations that are now sold to the GSEsrnmeans that the latter’s credit pricing has determined and cost of and access torncredit for a majority of all new mortgages. rnBy allowing other private credit enhancers to play a meaningful role atrnthe front end of the transaction, competition will be increased and thernbenefits delivered to both taxpayers and consumers.

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