Newly appointed Federal Housing Finance Agency (FHFA) Director Mel Watt is delaying the scheduled increases of the guarantee fee that Fannie Mae and Freddie Mac charge mortgage lenders. This misguided move will discourage other firms from competing in the secondary mortgage market
Fannie and Freddie charge this guarantee fee (or g-fee) to protect against credit-related losses in their overall mortgage portfolios. The increase in the g-fee was signaled for more than a year, and its goal was to properly price mortgage risk so that more private capital would enter the market. More private capital would make the job of winding down the now-defunct government-sponsored entities (GSEs) much easier, and attracting these funds has been the FHFA’s goal.
In its 2012 Strategic Plan, the FHFA outlined the scheduled increases in the g-fees in order
[t]o attract private capital to the mortgage market and reduce Enterprise risk exposure…[to align] pricing with actual risk and in an orderly manner that does not disrupt markets.
Then, in December 2013, former FHFA acting Director Ed DeMarco recommended increases in the g-fees in April and March of 2014 to ensure that
[p]ricing continues the gradual progression towards more market-based prices, closer to what one might expect to see if mortgage credit risk was borne solely by private capital. The price changes provide better protection of and return to taxpayers, who are providing the capital support that keeps these companies operating.
These policies seem to have been working—as demonstrated by Wells Fargo’s recent move to keep more home loans on its books rather than sell them to the GSEs. This sort of action indicates the potential of private capital playing a leading role in the housing market. At the very least, it suggests that private banks have been anticipating the higher g-fees.
The FHFA should continue with its scheduled g-fee increases in an effort to reduce Fannie and Freddie’s market activity and to encourage private capital to enter the mortgage market. Delaying these increases will only crowd out private capital and make it harder to manage the shutdown of Fannie and Freddie. Taxpayers deserve better than the continuation of failed GSE policies.