More disclosure on Fannie Mae, Freddie Mac fees needed: House hearing

The latest revision to the Federal Housing Finance Agency's recent pricing changes has addressed some concerns around them but they still bear scrutiny, some speakers told a House Financial Services subcommittee hearing on Wednesday.

"To be fair, we've … seen the FHFA reverse course on some components of the…changes, while also issuing a request for input on its method for determining [loan-level price adjustments]. These are positive but small steps in the right direction," said Rep. Warren Davidson, R.-Ohio, who chairs the subcommittee on housing and insurance. "While we welcome these changes, they are insufficient. 

"This committee will ensure we have appropriate risk-based pricing and an efficient mortgage market," he continued, calling upon speakers at the hearing to provide "insight on how we get that done."

Ed DeMarco, a former acting director of the FHFA and the current president of the Housing Policy Council, told the subcommittee that the recent changes "appear reasonably aligned with credit risk after accounting for the new capital framework, the cost of private mortgage insurance, and recognition that the riskiest cells in the grid represent very few enterprise purchases."

However, he said, "if market pricing produces a sub-optimal allocation of credit to certain categories of borrowers, there are better, and more effective, policy responses."

DeMarco called for new disclosures about the specific targeted return on equity the FHFA uses to review guarantee fees in its annual report.

Some of the challenge for the FHFA, in trying to accommodate both capital adequacy and its affordable housing mission, relates to the fact that it oversees quasi-public enterprises never meant to be fully tied to the government, he noted.

"It is asking a lot of an FHFA director to ... make what would otherwise be private business decisions while regulating the companies," he said, noting that he thinks that this points to a need to free the enterprises from conservatorship.

Clifford Rossi, professor-in-practice and executive-in-residence at the Robert H. Smith School of Business, University of Maryland, also called for more disclosure in LLPAs, and suggested potentially rethinking them altogether.

"While on the surface it can be argued that the LLPAs are transparent by virtue of pricing by risk attribute, the exact mechanics are murkier, thus setting the stage for second-guessing the new…grids and the need for a new approach," he said.

"I actually propose eliminating the current [credit score/loan-to-value ratio/LLPA] grids altogether and updating the guarantee fees consistent with achieving a target rate of return taking into account the [Enterprise Regulatory Capital Framework]," Rossi added.

Meanwhile, National Association of Realtors President Kenny Parcell showed some concern about how pricing has shifted with the new grid but noted that the residential market faces bigger challenges.

"This fee increase on some borrowers is another hurdle to owning a home. But the biggest impediment remains the lack of housing affordability and supply," Parcell said during the hearing.

Some speakers pushed back against Republican legislators' criticism of latest price changes, which centers on the notion that some borrowers with stronger credit and other ability-to-repay indicators are paying more than they were under the old regime, while certain of those with weaker scores pay less than they did on the prior grids.

While that may be true, the new pricing doesn't charge borrowers that indicators deem as riskier any more than safer ones, noted Janneke Ratcliffe, vice president in the Urban Institute's Housing Finance Policy center.  

"The traditional relationship between higher credit score and lower credit score borrowers remains," Ratcliffe said.

She cited some examples of relatively higher credit/lower loan-to-value ratio combinations that would pay slightly higher monthly dollar-amount fees in the double digits under the new grids. Meanwhile, a borrower with inverse characteristics would continue to pay three-figure LLPA but get a small double-digit price break.

And Rep. Steven Horsford, D.-Nev., said that credit scores, while a widely used standard, have their flaws and should be reformed. Hordsford's constituency is an area that was hard-hit by the Great Recession, a period in which some studies found credit scores fell short as a predictor of delinquency and default. 

He also pointed to a lack of transparency and allegations that scores have been biased, some of which revolve around the fact that they've historically omitted certain types of data like rent and cell phone payments that would help a more diverse set of borrowers establish and build stronger scores. (The FHFA, the government-sponsored enterprises it oversees and the credit reporting/scoring industries have been working on finding ways to incorporate these payment sources into their borrowers assessments.)

Overall, Horsford said he agrees with those who have characterized the new price changes as "modest in nature" and better aligned with "the balance of policy and market requirements the GSEs must consider."