By charging a 20-basis-point guarantee fee, Fannie Mae and Freddie Mac are probably achieving a 26% return on equity, according to an estimate by a Mortgage Bankers Association economist."I don't know what the [ROE] target is," MBA economist Jay Brinkman told an American Enterprise Institute seminar on the "g-fees" the two government-sponsored enterprises charge lenders. He estimated that a 12.4-bps g-fee would produce a 15% ROE. However, the GSEs are able to charge higher g-fees because of the lack of competition in conventional conforming mortgages and a lack of transparency in the fees they charge, he said. He stressed that the pricing of g-fees is driven more by capital requirements than by credit losses. In fact, the MBA became concerned when the Office of Federal Housing Enterprise Oversight imposed a 30% capital surcharge on the GSEs as a result of their accounting problems. "G-fees are so sensitive to required capital, we did not want OFHEO to impose a capital provision," Mr. Brinkman said. The MBA can be found online at http://www.mortgagebankers.org.

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