Servicers May See G-Fee Relief
Mark Sunday morning, Sept. 7, 2008, as the day the residential mortgage business changed forever.
In the months ahead, seller/servicers that upstream their mortgages to Fannie Mae and Freddie Mac may see little change in the way they conduct business with the two but rest assured the Treasury Department under Hank Paulson has laid the groundwork for the eventual dismantling of these once politically powerful (and once highly profitable) government-chartered enterprises.
Over the long haul the takeover of the two GSEs could set the stage for housing deflation the likes of which Americans have not seen since the Great Depression and then some.
With less liquidity in the mortgage market that means less homebuyers and less homebuyers creates intense pricing pressure on the downside, which could lead to higher loan delinquencies.
Eventually, Treasury wants the two to whittle down their on-balance-sheet portfolios to $250 billion, about one-third of where they are today. Once the two GSEs stabilize, whoever sits in the White House will move to find a long-term solution to Fannie and Freddie.
They could survive as separate smaller companies with congressional charters or they could be made into one government agency that serves only low- and moderate-income Americans. If that happens the mortgage business likely will shift back to portfolio lenders like savings and loans, banks and credit unions.
The loans these institutions make will be placed on their books and kept for the long haul, which is what the business was like until the S&L crisis of the 1980s.
One thing is for certain: the mortgage industry of the past two decades - one where most residential loans were sold to Fannie, Freddie and Wall Street firms like Bear Stearns, Merrill Lynch and Lehman Brothers - is on the road to extinction. What lies ahead could spell opportunity or death for today's surviving seller/servicers.
Meanwhile, some industry executives are hoping the government takeover could lead to reduction in the guarantee fees the mortgage giants charge lenders and a rollback in new loan delivery fees that were introduced this year. (In years past, the average "g-fee" was 23 basis points, though some firms paid more or less than that, depending on their risk profile and pledged loan sales.)
"We are hoping they will reduce the fees that they raised," said one trade group executive, requesting his name not be used.
When Treasury secretary Henry Paulson announced the seizure of the GSEs, he said the government would look to examine the guaranty fee "structure with an eye toward mortgage affordability." The FHFA also intends to establish rules for setting guarantee fees. One mortgage insurance executive said he expects a reduction in g-fees for higher loan-to-value ratio mortgages.
Over the past nine months, Fannie and Freddie have implemented several loan fee increases as price adjustments for market risk and to increase their profits. Lender and industry trade groups complained the increases were making mortgage credit too expensive to consumers, but GSE officials insisted the increases were necessary.
Now that the Federal Housing Finance Agency has placed the GSEs in separate conservatorships, the regulator has an opportunity to lower the fees.
"If they do that, that will help further stem this decline in house values and spur consumer demand. It is the exact right thing to do," said Jerry Howard, chief executive of National Association of Home Builders.
When it comes to residential loan purchases from frontline originators, Fannie and Freddie are considered the only game in town. The GSEs had a combined loan purchase market share of 65.21% in the first half, buying $687 billion in mortgages from their seller/servicers, according to figures compiled by Mortgage Servicing News.
For all of 2007 the two GSEs had a purchase market share of 49.96%. The market share figure is calculated by taking all their mortgage loan purchases and dividing it by total residential originations.
In 2005, at the height of the subprime boom, the GSEs had a purchase market share of just 36.25%, according to MSN. This was a period when Wall Street firms like Bears Stearns, Lehman Brothers, Merrill Lynch and others pumped up the subprime industry by lending money to non-banks and purchasing their risky loans which they then packaged into asset-backed securities. Today, the subprime market is near nonexistent. Without Fannie Mae and Freddie Mac, mortgage originators - especially non-depositories - would be without a source of liquidity in the secondary market. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/