Regulator: GSEs Need Fees to Cover Risk On Loans

The high upfront fees Fannie Mae and Freddie Mac charge on certain single-family loans still do not "fully cover" all the costs and risks associated with those loan guarantees, according to Federal Housing Finance Agency acting director Edward DeMarco.

In response to a letter by Rep. Scott Garrett, R-N.J, the GSE regulator notes that substituting deeper private mortgage insurance coverage for the fees would not be suitable.

The PMI industry "remains at risk of being unable to meet all future claims on existing business," DeMarco says in the Dec. 6 letter. 

"Substituting deeper mortgage insurance coverage for the current fees would add to the enterprises’ already sizeable counterparty credit risk with mortgage insurers, while foregoing the added guarantee fee income to help cover the credit risk on higher-risk mortgages," the regulator says.

Rep. Garrett will be the chairman of the Capital Markets, Insurance and GSE subcommittee when the new Congress convenes in January.

The steady increase in upfront fees that borrowers have to pay on GSE loans has raised the ire of lenders, Realtors and homebuilders over the past 18 months.  The government sponsored enterprises raised their upfront fees again in December.

Many complain that Fannie and Freddie under the direction of their regulator are just trying to raise additional revenue to make up for past loan losses.  But it appears the upfront fees may also be a form of self-insurance.

Director DeMarco noted the mortgage insurers "may be able to play an important role in absorbing risk in the future housing finance structure that I hope will be moving expeditiously toward. If they do, it will be because they are in a strong financial condition," he said.