Higher agency guarantee fees will help mortgage lenders that want a return of private capital to the secondary market in the long term, although they have a hard time seeing that.
“It’s clearly not always seen as a positive thing because it ultimately increases the cost of the mortgage,” says Tom Deutsch, executive director of the American Securitization Forum. “But…if you have no guarantee fees you would be effectively pricing 100% government guarantee for free.”
Recent g-fee levels fail to put a price on mortgage risks in line with what the private market charges, a common gripe at the Mortgage Bankers Association’s secondary market conference this year.
Estimates put the “magic point” at which loans sold into private-label securitizations would be competitive with agency execution somewhere between 50 basis points and 100 basis points higher, Deutsch says.
“We’re not advocating it happen overnight,” Deutsch says. The ASF is an organization long focused on fielding securitization developments with the aim of ensuring they fail to disrupt the smooth functioning of the market, so it also would only want it to happen in a gradual and orderly way.
“This should not be a reallocation to pet projects,” he adds.
Almost every loan meeting the government-sponsored enterprises’ criteria currently gets sold to them, which means they lack competition, Deutsch notes.
“If you raise the g-fees to the right level at least some loans won’t be sold to the GSEs (that otherwise would be),” he says.
This would create a more diverse source of funding for mortgages and make the market for loans more competitive, resulting in “pricing that is more natural than arbitrary.”
This could put some marginal upward pressure on the prices lenders receive selling loans into the secondary market, but this has to be weighed against an increased cost to consumers and lenders to produce loans that would hurt origination volume.
“Lenders want to originate as large a volume as possible, and any increase in prices overall reduces demand for product,” Deutsch acknowledges.
The question on whether Fannie Mae and Freddie Mac should increase g-fees “ultimately is a policy debate” revolving around the question, “How much should the government be subsidizing the mortgage market?” Deutsch says.
Policymakers’ moves on the issue have been mixed. An increase has been tied to other government projects in the past, but last week congressional budget negotiators dropped plans for a g-fee hike, noting that it would make GSE reform more difficult by increasing its price tag.
Ed DeMarco, the acting director the Federal Housing Finance Agency that regulates Fannie and Freddie, like Deutsch has viewed marginal g-fee increases as a way to encourage private capital’s return to mortgages and scale back the GSEs. The position of the new FHFA nominee, Mel Watt, is unclear.
There are questions about whether legislated GSE reform will occur or is actually necessary at this point given Fannie and Freddie’s return to profitability but to protect taxpayers from exposure the kind of inordinate risks that hurt the agencies’ finances during the downturn, Deutsch still thinks the process of scaling back the agencies in a way that can be done without congressional approval should continue.
Given the market’s current stability relative to the downturn, Deutsch believes, “it’s a time to be ratcheting down the government involvement but clearly not eliminating it overnight.”
This could be in the form of increasing g-fees and via other moves such as rolling back Fannie and Freddie’s maximum loan sizes.
While Watt has held his cards close to the vest, his history suggests he may be more inclined toward government intervention in the mortgage market than his predecessor, suggesting he might keep g-fees lower and loan limits higher. Lenders have mixed feelings about that.
“In the short term, I’m happy for the new year,” says Brian Koss, EVP at lender Mortgage Network, who thinks more rather than less GSE presence in the market helps right now, particularly given the increased regulatory burdens and recent rate increases that have hurt lenders’ finances and loan volumes.
“But in the long term it is going to hurt us,” he adds. “We’ve got to get on with it at some point, and get off the government fees.”